Impact of CMS Proposal on Health Insurer Stocks and Medicare Payments

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Health insurer stocks have faced a significant downturn following a new proposal from the Centers for Medicare and Medicaid Services (CMS) that impacts future payment expectations. The CMS proposal suggests a meager 0.09% payment increase for Medicare insurers in 2027, a stark contrast to the anticipated 4% to 6% increase predicted by industry analysts, as reported by The Wall Street Journal. This unexpected projection follows a previously higher 5.06% increase in Medicare payments for 2026, affecting the stability of financial forecasting for payers and providers.

The CMS's proposed changes include adjustments to patient diagnosis regulations, amid increasing regulatory compliance requirements and scrutiny, such as a Department of Justice investigation into allegations against UnitedHealth Group (UNH). Allegations suggest UnitedHealth directed physicians to adjust diagnoses of Medicare Advantage patients, potentially inflating insurer reimbursements. UnitedHealth has denied these claims, noting the importance of adhering to ethical underwriting and compliance standards.

The market response was swift, with UnitedHealth's stock declining nearly 20% in early trading. Other major carriers like Humana (HUM) and CVS Health (CVS), owner of Aetna, also experienced significant drops of 21% and 11%, respectively. Medicare payment rates hold significant importance for the risk management and financial health of insurance companies, with CMS estimating that the proposal could inject approximately $700 million into the industry.

Incorporating these changes on the same day, UnitedHealth reported its fourth-quarter earnings with adjusted earnings per share at $2.11 on revenues amounting to $113.22 billion, closely aligning with Visible Alpha's estimates. Yet, projections for 2026 show revenues at $439 billion, shy of the $455.5 billion expected by Wall Street analysts. The company's stock has seen a steep decline, losing about 50% over the past year, amid challenges from increased claims activities within Medicare Advantage and ongoing investigations that impact profitability.