Humana and other managed-care stocks experienced significant declines in after-hours trading on Monday following the Centers for Medicare and Medicaid Services’ (CMS) announcement of an average 3.7% increase in revenue for Medicare Advantage plans in 2025. While this figure matches the proposed increase announced in January, it came as a disappointment to investors who had hoped for a slight bump. Humana saw a 9% drop in after-hours trading to $319, while UnitedHealth Group and CVS Health, which owns Aetna, were down 5% each to $464 and $75, respectively.
Despite the unchanged 3.7% increase from the January proposal, insurers and analysts argue that it effectively amounts to a cut when certain assumptions baked into that raise are stripped out. By their calculations, the announcement translates to a roughly 0.16% reduction in the benchmark rate. Nonetheless, CMS estimates that health insurers will still receive over $16 billion more than their 2024 revenue.
Whit Mayo, senior managing director at Leerink Partners, had previously stated that anything less than a 1% increase in payments would likely disappoint investors and cause Medicare Advantage insurers’ shares to decline.
This development comes at a crucial juncture for Medicare Advantage, which now enrolls more than half of the eligible Medicare population, surpassing 30 million people. The Biden administration has introduced numerous regulations aimed at safeguarding Advantage consumers and curbing increases in government expenses due to industry practices.
Despite rising revenue, insurers are facing escalating costs, including labor, drugs, and medical services, exacerbated by the lingering effects of the pandemic. The implementation next year of a provision capping Medicare beneficiaries’ out-of-pocket spending on prescription drugs at $2,000 annually, indexed for inflation, is expected to further strain insurers. While stand-alone Part D drug plans may increase premiums to offset rising costs, Medicare Advantage plans offering drug coverage at no extra cost are hesitant to raise premiums to maintain their competitive edge.
Consequently, analysts anticipate benefit cuts for Medicare Advantage members to offset higher costs. While established supplemental benefits like dental, vision, and hearing are likely to remain untouched, newer benefits such as transportation and food assistance are more vulnerable to reductions. Investors are adjusting their expectations to account for the challenges ahead, recognizing the severity of the economic realities facing the industry.