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Health insurance giants, including UnitedHealth (UNH), Elevance Health (ELV), CVS Health (CVS), Centene (CNC), Humana (HUM), and Molina (MOH), are gapping lower today after the Centers for Medicare & Medicaid Services (CMS) finalized payment updates for 2025 Medicare Advantage (MA) and Medicare Part D programs yesterday after the close.

The reason for such a strong reaction today to the update was that payments from the government to MA plans are expected to tick up by just an average of 3.70%. While this was the number already proposed earlier this year, the market was hoping for a higher rate given the pressure the health insurance industry was putting on the current administration, thus driving today's aggressively negative response.

• What does a lower-than-anticipated rate mean? In Medicare Advantage, the government signs with private insurers to provide Medicare benefits to enrollees, paying these insurers a specific amount per enrollee each month. Health insurers rely on these government funds to help cover MA costs. Without a higher payout rate from the government, costs for health insurers will rise, potentially clipping earnings forecasts.
• The unchanged rate for 2025 could disadvantage some health insurers more than others. For example, UNH remarked in January that the reduced MA funding outlook was a significant factor in how it prepared for 2024 through 2026. UNH's MA business may not carry huge margins, but it has become a rapidly growing part of its overall business. Meanwhile, CNC noted in February that the initial MA rates were insufficient, given rising medical cost trends. CNC's MA business may be a fraction of its overall operations, but the company stated it represented a meaningful margin expansion opportunity.
• Care costs are already rising, making the unchanged MA rate all the more worrisome. A recurring trend among insurers in Q4 was a bubbling medical care ratio (MCR), the percentage of premiums used to cover claims. Part of this emerged from increased activity in outpatient care for seniors. Higher care costs were considerable for HUM, which increased its MA adjusted benefit ratio by nearly 200 bps ahead of its Q4 results, reflecting higher than expected MA medical expenses. Management stated in January that it was navigating unprecedented increases in medical cost trends.

Bottom line, although the current MA funding rate increased by the number initially floated to start the year, the market was expecting the health insurance industry to push back enough to convince the government to raise its forecast. Unfortunately for health insurers, the government held its ground, driving a sharp sell-the-news reaction today. With healthcare costs rising across the board, an unchanged MA rate was precisely what insurers were looking to avoid. The development could spur lowered FY24 earnings forecasts. Most insurers report Q1 earnings within the next few weeks. A clearer picture will likely be provided at that time.