CVS Health Corp CVS

Medicare Advantage Final Rate Notice Weaker Than Anticipated, Cutting Into Our Humana FVE by 5%

In an unusual development, the Centers for Medicare & Medicaid Services released its final Medicare Advantage, or MA, rate notice that matched its initial rate notice, instead of rising. In this final rate notice, the overall increase in MA revenue to insurers remained lower than the risk score trend, which is likely to pressure MA benefits, pricing, and/or insurer profits in 2025. We are reducing our fair value estimate on Humana by 5% on this disappointing development, given its focus on MA and our expectation that its previous profit goal in 2025 and potential growth in subsequent years may be constrained. However, we are not changing our fair value estimates on the other more diverse managed care organizations, or MCOs, that we cover, and market price declines on this news may create more attractive investment opportunities for investors with a long-term investment horizon. Currently, Humana, CVS, and Centene remain the most attractive MCOs on a price/fair value basis.