Jan 27 - Shares of major health insurers slid in premarket trading on Tuesday following the federal governments proposed update to Medicare Advantage payment rates for 2027. UnitedHealth fell 8%, CVS dropped around 9%, and Humana declined nearly 14% as investors reacted to a smaller-than-expected increase.
The Centers for Medicare and Medicaid Services said the Medicare Advantage payment rate will rise by 0.09% in 2027, generating more than $700 million in additional payments. Analysts had been anticipating a significantly larger increase, with expectations as high as 6%.
Analysts expressed that the modest bump is unlikely to match medical cost trends, putting pressure on insurer margins. "Simply put, the potential rates compared to the cost trend will likely be insufficient and require significant benefit reductions or plan exits to offset 2027 margin pressures," said Baird analyst Michael Ha.
Market watchers said the limited increase could delay the restoration of previously expected earnings momentum among companies with substantial Medicare Advantage exposure. "This (rate) is below our and Street expectations and we believe the implementation of the rule will likely result in a delay of the embedded earnings story for companies with meaningful exposure to MA," said Mizuho analyst Ann Hynes.
Medicare Advantage rates are typically finalized in early April. Some analysts noted the timing and size of the proposed update as notable. "Generally, the proposed update is better in the final, certainly some politics could be at play, but this update falls well below expectations," said Leerink analyst Whit Mayo. Mayo added that releasing the Advance Notice before UnitedHealths earnings report made coincidence unlikely.
The industry bellwether is scheduled to report fourth-quarter results on Tuesday, and investors will be watching how the proposed payment rates could affect profitability and guidance. The government said the proposed update reflects a combination of underlying cost trends, 2026 quality ratings and adjustments to the risk adjustment model, a system that compensates insurers more when their patients are sicker.
Implications for markets and companies
- Insurers with large Medicare Advantage footprints face potential margin pressure if the modest rate increase does not cover rising medical costs.
- Equity markets reacted quickly, with notable premarket declines in stocks of UnitedHealth, CVS and Humana.
- Investor focus will include upcoming quarterly results and how carriers adjust benefits, pricing or plan participation to cope with the proposed update.
The proposed update and attendant market reaction underscore the sensitivity of insurer profitability to regulatory rate-setting and cost trends. With final rates expected in early April, companies and investors will be monitoring both the policymaking process and near-term earnings reports for guidance on how the sector will navigate the margin challenges signaled by the proposal.