Insurance giants have a bigger stake in this year’s presidential election after recent moves by the Biden administration cut into the profitability of Medicare Advantage plans.
In the last week, the Centers for Medicare and Medicaid Services delivered consecutive blows to the industry that offers these private-sector Medicare alternatives, denting insurance stocks and pulling down estimates of future earnings.
Insurers will get paid less than expected next year for providing these plans, while, at the same time, they must abide by new, and probably costlier, regulations. Other key changes rolling out over the next three years could also nick their bottom lines.
The industry expects a second term for President Joe Biden would bring more of the same at a time when the youngest baby boomers become Medicare-eligible and more of the older ones seek healthcare services.
"Do I wanna say it's a historic level of regulations? If it's not, it's got to be close to it," Whit Mayo, an analyst with Leerink Partners, told Yahoo Finance. "Biden is no friend to the industry right now."
'A major change'
The new regulations have come hard and fast in the last year.
Last week, the government said it would increase its payments to Medicare Advantage (MA) insurers by 3.7% in 2025. That’s "marginally worse" than the earlier, proposed rate, Mayo said, and “inconsistent with almost any historic precedent.”
It also caught the industry by surprise because many expected CMS to incorporate the uptick in healthcare service volumes in the fourth quarter.
A few days later, CMS finalized other rules around health equity, behavioral healthcare services, and supplemental benefits that would require more action from insurers.
The agency also established new rules on how much insurers can compensate a broker selling Medicare Advantage plans to ensure seniors are steered into plans that best meet their needs — not into ones that are most profitable.
“CMS does not want an agent to have preference over any plan based on commissions…so this is a major change,” Mayo said.
These efforts are weighing down insurer stocks.
Year to date, shares of Humana (HUM) — which has the largest exposure with MA accounts making up 77% of its total revenue — are down 30%.
The stock of UnitedHealthcare (UNH) has also declined nearly 13% since the beginning of the year. MA accounts make up 31% of UnitedHealthcare's total revenue, according to Ann Hynes, managing director at Mizuho Americas.
In a note last week to investors, Hynes estimated the 3.7% increase in the MA payment rate could be a 2% and 4% "headwind" for UnitedHealthcare’s 2025 earnings, a 2% to 6% drag on both CVS Healthcare Corp.’s (CVS) and Centene Corp.’s (CNC) profits, and an 8% anchor on Humana’s bottom line.
One of the three "key upcoming catalysts" for Humana’s stock, Hynes wrote, is “the 2024 Presidential election.”
On the horizon
More change is on its way under the Biden administration’s CMS that could also upend insurance profits.
The agency recently put out a new patient risk coding model. Each patient receives a risk score based on the number and severity of their health conditions. The unhealthier the patient, the more money CMS pays the insurers.
Under the new model, risk scores will overall likely decline, meaning fewer dollars will flow to insurers. How much exactly? The model, which will be fully phased in 2025, is expected to save Medicare $11 billion this year, per CMS estimates. Next year, it will likely be more.
How Medicare Advantage plans are rated by CMS is also changing.
CMS ranks each plan annually using a one-to-five-star scale, with five being the best, based on a variety of metrics. The idea is to reward plans that provide quality care with reimbursement and bonuses, while cracking down on mediocre plans by reducing CMS payments and restricting their marketing.
Over the next three years, CMS plans to increase or decrease the weighting of some measures, eliminate others, and add a health equity index to the ranking. Insurers work hard to maintain at least a four-star rating on their plans to get a 5% quality bonus, which, by law, must be invested into plan benefits.
"That's what gives you a competitive advantage in the market," Mayo said.
Insurers also remain under pressure from increasingly vocal healthcare providers, which are dropping some Medicare Advantage plans due to too many denials, delays, and refusals to pay for care that Original Medicare would usually cover.
October surprise, anyone?
Under Donald Trump, those changes may not be carried out.
"I think the perception among the investment community is that under a Trump administration, the environment would be more favorable,” Mayo said. “Just not as much regulation, maybe even roll [some] back."
It may be seniors — historically one of the most reliable voting blocs — who may get the last word.
Mayo expects insurers will readjust some of the MA benefits so they can grow — or at least hold — their margins in light of the recent changes, a reversal of the yearslong cycle of "massive" investment in these perks.
Extras like a supplemental grocery benefit could be eliminated for next year, while the share that patients pay out of pocket for services such as dental or vision care could increase.
Seniors will see those reductions in benefits or increases in co-insurance during Medicare’s annual open enrollment period, when they choose their health insurance for next year. Open enrollment kicks off Oct. 15, less than a month before the presidential election on Nov. 5.
That means the 33 million Americans now enrolled in Medicare Advantage plans, making up over half of Medicare-eligible adults, may get mad after their plan drops benefits that enticed them to sign up in the first place.
They may carry that anger into the voting booth. That may be what insurers are hoping for.
