Managed Care Companies Hit With Weak Medicare Advantage Initial Rate Notice and New Risk Rules
We are holding off on changing stock valuations until rules are finalized.
After hours on Jan. 26, the Centers for Medicare & Medicaid Services released its initial rate notice for the 2027 Medicare Advantage program, which included a flat overall rate increase rather than the 5% increase in 2026. Most of that differential is related to new risk assessment-related changes.
Why it matters: Reflecting another regulatory crackdown of a key MCO market, big MA insurers—CVS (negative 9%), Humana (negative 20%), and UnitedHealth (negative 20%)—fell the most while less concentrated players—Centene (negative 11%), Elevance (negative 11%), Molina (negative 4%)—fell more moderately and Cigna was down 3%, due to its lack of MA plans.
- In May 2025, we incorporated lower MA margins into our models due to potential new MA regulations related to aggressive risk assessments in this population, but we did not anticipate a flat-rate environment as seen in this initial notice.
- More positively, investors should note this initial notice is typically not finalized until April, meaning the flat 2027 rate may rise. CMS already foreshadowed a potential 2.5% increase from this initial draft, due to expected billing trends not yet included.
The bottom line: While we are not changing our fair value estimates on the 4-star MCO insurers because these rates have yet to be finalized for 2027 and may not persist at these low levels in the long run, a low-single-digit run rate on MA rates in the long term would likely pressure our fair values.
- Specifically, we currently assume that MA rates increase in the midsingle digits over the long run, so a permanent cut in MA rates to about 2.5% and further pressure on MA margins could trim roughly mid-single to low-double-digit percentages off our fair values on the big MA insurers.
- However, assuming a 2.5% rate increase for just one year before returning to mid-single-digit rate increases for the big MA insurers, and/or considering the lower MA concentrations at the other MCOs, would likely result in immaterial changes to valuations.
Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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