Why the CMS' Medicare Advantage rate is hurting stocks of Humana, UnitedHealth

By Tomi Kilgore

Humana's stock tumbles to a 4-year low, UnitedHealth's stock leads the Dow's decliners toward a 9-month low

Shares of health insurers providing Medicare Advantage plans were hit hard Tuesday, after the Centers for Medicare and Medicaid Services announced a payment rate that disappointed investors looking for a bigger increase.

CMS said late Monday that under the 2025 Rate Announcement, government payments to Medicare Advantage (MA) plans are expected to increase by 3.7% on average, or by $16 billion, from 2024.

That's the same as what the CMS had said in January, before hearing feedback from the managed-care industry, which pushed for a bigger increase.

Read: Medicare drug price negotiations hit critical phase.

As Mizuho analyst Ann Hynes explained, the 2025 final effective rate, excluding assumptions of risk-score trends, is a decline of 0.16%, while Wall Street was expecting an increase of 1 percentage point.

In early February, Humana Inc. said while the estimate was for an effective decline of 0.16%, the company's calculations put the actual decline at 1.6%.

Keep in mind that back on Jan. 25 - about a week before the CMS provided its initial rate estimate - Humana's stock had tumbled about 12% after the company posted a fourth-quarter loss and provided a full-year outlook that was well below expectations, citing higher MA cost trends.

Analyst Michael Wiederhorn at Oppenheimer said most MA plan providers said they were focusing on improving margins rather than growth over the near term.

"As the final rate did not include the expected 50-100 [percentage point] improvement, we expect this to bring an incremental headwind for companies that are already pulling all levers to overcome the impact of the prevailing utilization challenges," Wiederhorn wrote.

Shares of Humana (HUM) tumbled 14.1% in morning trading, to put them on track for the lowest close since April 3, 2020.

The stock, which was also headed for the biggest one-day selloff since it tumbled 19.4% on Jan. 6, 2022, was pacing the S&P 500 index's SPX decliners.

CVS Health Corp.'s stock (CVS) was the S&P 500's second-biggest decliner as it dropped 8.1%, and UnitedHealth Group Inc.'s stock (UNH) sank 6.2% toward a nine-month low to lead the Dow Jones Industrial Average's DJIA losers.

Elsewhere, shares of Elevance Health Inc. (ELV) slid 3.2%, Centene Corp.'s stock (CNC) was down 5% and Molina Healthcare Inc. shares (MOH) shed 5.4%.

Mizuho's Hynes noted that the plan from CMS included additional payment data through the fourth quarter of 2023, in which risk trends for the quarter were consistent with the agency's projections.

"This had been a key point of contention with the industry, arguing that the preliminary rate did not contemplate the elevated utilization results in October through December, which represented a significant portion of the elevated trend," Hynes wrote in a note to clients.

J.P. Morgan's Lisa Gill noted that before 2024, payments made by CMS for medical education expenses related to services for MA enrollees were part of fee-for-service data used to calculate the MA cost trend. Basically, MA plans were booking revenue for these costs even though the expenses were paid by CMS.

Starting this year, Gill said CMS will start phasing out those payments from the data used to calculate FFS costs. That was expected to happen in equal phase-outs over the next three years, but CMS had proposed in January that two-thirds of phase out would occur in 2025.

But after receiving industry pushback, the CMS decided to only implement 52% of the phase out in 2025.

-Tomi Kilgore

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04-02-24 1037ET

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