Key points:

  • Shares of American health insurance companies fell by 6-12%.
  • Reason: CMS announcement of 2025 Medicare Advantage rates.
  • CMS announced no growth in demand for medical care in the 4th quarter. 2023, however, insurers (Humana, UnitedHealth), on the contrary, noted an increase in the number of claims.

On Tuesday, shares of US health insurance companies showed declines ranging from 6% to 12%. The drop was driven by the government’s announcement of final Medicare Advantage rates for 2025. These bets, which involve reduced payouts, have raised concerns among investors that companies’ profitability will deteriorate.

Despite pressure from companies and industry groups to lobby for rate changes to accommodate a year-end surge in demand for health care, the final numbers remained unchanged from the January proposals. A decrease in average payments by 0.2% had a negative impact on the value of shares of companies in the sector.

How much did the stock drop?

The U.S. Centers for Medicare and Medicaid Services (CMS) has traditionally adjusted reimbursement amounts upon prior notice. In 2024, CMS announced final Medicare Advantage rates for 2025 that were lower than expected.

Reduced benefits could negatively impact the profitability of health insurance companies. In addition, their operations are already under pressure from rising medical costs. Uncertainty surrounding the consequences of the hacker attack on UnitedHealth and possible changes to the insurance claims processing system also do not add optimism to investors.

Health insurance stocks fell sharply as a result of the CMS announcement. Health care company Humana posted the biggest decline, down more than 12%. Shares of UnitedHealth and CVS Health lost 6.6% and 7.7%, respectively.

The sharp decline in the value of healthcare stocks has negatively impacted the Dow Jones and S&P 500 indices.

Possible consequences

In its newest notice, released Monday, CMS said there was no growth in demand for health care in the fourth quarter of 2023. The announcement contrasts with recent comments from major insurers such as Humana and UnitedHealth, which have noted an increase in year-end health care claims.

The rates set by CMS make a big difference to health insurance companies. They determine how much insurers can charge for monthly premiums, what benefits they can offer their customers, and ultimately their profits.

The combination of high medical costs and low rates set by CMS is forcing insurers to reduce the number of benefits they offer, Kevin Fishbeck, an analyst at BoFA Securities, said in a research note.