UnitedHealth, CVS, Other Insurer Stocks Slide on Medicare Proposal

NEW YORK – Shares of major health insurance giants tumbled in heavy trading Wednesday after the Biden administration unveiled a draft proposal for 2025 Medicare Advantage payment rates that fell short of industry expectations and signaled a continued crackdown on insurer reimbursement models. The news sent a chill through the sector, erasing tens of billions of dollars in market value and raising concerns about future profitability for a program that has become a critical growth engine for the industry.

The sell-off was swift and broad, hitting the largest players in the lucrative Medicare Advantage (MA) market. UnitedHealth Group (UNH), the nation's largest insurer, saw its stock fall by as much as 4.5%. Humana (HUM), whose business is heavily concentrated in Medicare Advantage, plunged over 6%. CVS Health (CVS), which owns Aetna, and Elevance Health (ELV) also saw their shares drop by approximately 3.8% and 3.2%, respectively.

This market reaction underscores the high stakes involved in the annual rate-setting process by the Centers for Medicare & Medicaid Services (CMS). With more than 31 million Americans—over half of all eligible beneficiaries—enrolled in these private Medicare plans, even minor adjustments to payment formulas can have billion-dollar implications.

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The Immediate Fallout

The proposed 2025 Advance Notice, a preliminary document outlining potential payment and policy changes, was the clear catalyst for the downturn. Investors are reacting to a top-line number that, once adjusted for other factors, points to a potential compression of profit margins next year.

• By the Numbers: The sell-off wiped a combined total of over $40 billion in shareholder value from the top five managed care organizations within hours of the proposal's release. Trading volume for these stocks was more than double the daily average.

• Analyst Concerns: Wall Street analysts immediately flagged the potential for lower-than-expected revenue growth in 2025. The core concern is that the proposed rate update will not be sufficient to cover rising medical costs, which have been trending higher post-pandemic, and will force insurers to either scale back supplemental benefits or accept lower profits.

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Digging into the Proposal

While CMS proposed a headline-grabbing 3.7% increase in the base payment rate, other technical adjustments within the 200-page document effectively reduce the net financial impact for insurers. The details reveal a multi-pronged effort by regulators to rein in costs.

• Effective Rate Disappointment: The key issue is the "effective" rate. After factoring in changes to the Medicare Advantage risk-coding model, analysts at several investment banks calculate the net increase to be closer to 1.5% - 2.0%. This is significantly below the 3% - 4% net increase the industry had been anticipating to keep pace with medical inflation.

• Risk Adjustment Crackdown: CMS is continuing its push to refine the risk-adjustment model, which pays plans more for sicker patients. The 2025 proposal accelerates a phase-in of a new model that removes certain diagnosis codes that regulators believe are frequently misused by plans to inflate payments—a practice known as "upcoding." This change directly reduces the revenue insurers can expect to receive for their enrolled populations.

• Star Ratings Pressure: While not a new change in this notice, the financial impact of recent modifications to the Star Ratings quality program is also being felt. Fewer plans are achieving the 4- and 5-star ratings that trigger significant bonus payments, adding another layer of financial headwind for 2025.

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The Bigger Picture: A Profitable Program Under Scrutiny

Medicare Advantage has been a golden goose for the insurance industry for over a decade. The plans, which are private alternatives to traditional government-run Medicare, are popular with seniors for offering bundled services, including prescription drugs, and extra benefits like dental, vision, and gym memberships, often for a low or zero monthly premium.

This growth, however, has attracted intense regulatory and political scrutiny.

• The Core Debate: Proponents, primarily the insurance industry, argue that MA plans deliver coordinated care and valuable benefits at a competitive price.

• The Critic's View: Watchdog groups and government bodies, including the influential Medicare Payment Advisory Commission (MedPAC), have repeatedly argued that Medicare Advantage costs taxpayers more per person than traditional Medicare. They contend that the risk-adjustment payment model has systematically overpaid private plans for years. The CMS proposal is seen as a direct response to these long-standing criticisms.

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What to Watch Next

The publication of the Advance Notice kicks off a crucial period of intense lobbying and negotiation between the industry and the federal government.

• The Comment Period: The proposal is now open for a 60-day public comment period. Insurers and their powerful lobbying arm, America's Health Insurance Plans (AHIP), will mount a significant campaign to persuade CMS to soften the final rule. Their primary argument will be that these proposed payment levels will force them to reduce benefits and increase costs for seniors, potentially making the plans less attractive.

• The Final Decision: CMS is required to publish the Final Rate Announcement by April 1, 2024. This will lock in the payment rates for the 2025 plan year. Historically, the final notice often includes modest concessions to the industry, but the overall direction set by the advance notice is rarely reversed.

• Investor Implications: For investors, the next two months will be a period of heightened uncertainty. The final rate will determine the revenue and margin outlook for insurers' Medicare businesses in 2025. Until the final rule is published, these stocks are likely to remain under pressure as the market digests the potential for a less profitable, more tightly regulated future for Medicare Advantage.