Shares of Humana (HUM) and other managed care stocks are under pressure after the Centers for Medicare and Medicaid Services, or CMS, said payments from the government to Medicare Advantage plans are expected to increase on average by 3.7%. The decision to leave MA payments unchanged from its initial January proposal was viewed as disappointing to insurers and healthcare investors.
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Both Barclays and TD Cowen lowered their price targets for Humana following the news, while Craig-Hallum said this would be an incremental headwind for eHealth (EHTH) in addition to CMS’s proposed regulations targeting brokers specifically.
CMS ANNOUNCES 2025 RATES: CMS announced that it had finalized the calendar year 2025 Rate Announcement for the Medicare Advantage and Medicare Part D Prescription Drug Programs that updates payment policies for these programs and ensures payment accuracy.
“Under this CY 2025 Rate Announcement, payments from the government to MA plans are expected to increase on average by 3.70 percent, or over $16 billion, from 2024 to 2025. The federal government is projected to pay between $500 and $600 billion in Medicare Advantage payments to private health plans in 2025. CMS is also finalizing improvements to the structure of the Medicare Part D drug benefit for CY 2025 that will result in lower drug costs for millions of people with Medicare through the concurrent release of the Final CY 2025 Part D Redesign Program Instructions. Thanks to the Inflation Reduction Act, President Biden’s lower-cost prescription drug law, annual out-of-pocket costs will be capped at $2,000 for people with Medicare Part D in 2025, leading to even more savings for people with Medicare Part D in CY 2025,” CMS said.
UNFAVORABLE OUTCOME: Morgan Stanley sees the final 2025 MA rates as 4 basis points worse than the Advance notice. Its calculation excludes Star Ratings and Risk Score Trend as they are plan specific items. This reduction vs. the Advance notice is well below the firm’s expectation of a 90bps increase from Advance to Final and likely below broader investor expectations. Dependent on relative MA exposure, Morgan Stanley expects stocks in the space to trade down mid-single digits on average.
Voicing a similar opinion, Evercore ISI notes that with most anticipating some improvement in the effective growth rate based on its conversations, the rate release comes as a disappointment for Managed Care and related value based care participants who are likely to see continued margin pressure in 2025.
BELOW EXPECTATIONS: Commenting on the news, Craig-Hallum noted that CMS published final payment rates for Medicare plans which will be identical to proposed rates in January but below Street expectations as the market expected litigation to result in increased payment rates to offset higher medical utilization. The firm expects payers to cut back on Medicare plan benefits, alter plan designs, and potentially pull out of certain markets, all of which could slow enrollment growth and drive higher industry churn. Craig-Hallum further notes this would be an incremental headwind for Hold-rated eHealth in addition to CMS’s proposed regulations targeting brokers specifically.
TARGET CUTS FOR HUMANA: TD Cowen lowered its price target on Humana to $396 from $427, while keeping a Buy rating on the shares. The firm noted the CMS released finalized rates for Medicare Advantage for 2025, which was disappointing to insurers. Cowen still sees an attractive multi-year margin recovery story from these levels but believes the 2024 Presidential Election now matters even more since the current administration seems likely to relentlessly compress Medicare Advantage funding.
Barclays also lowered its price target on Humana to $310 from $356, but kept an Equal Weight rating on the shares. The final Medicare Advantage rate for 2025 from the Centers for Medicare & Medicaid Services showed no improvement from the proposed rule and came in well below the low-end of investor expectations, the firm tells investors in a research note.
WHAT’S NOTABLE: BofA downgraded Humana to Neutral from Buy with a price target of $342, down from $470, as the firm sees the deteriorating rate environment becoming a risk to forward estimates. The new trajectory should support 20%+ EPS growth for a number of years as the industry reprices, albeit with lower membership growth, Barclays tells investors in a research note. Humana had talked about the rate proposal as being 160 basis points lower than their original expectations which equates to roughly $10 of EPS in aggregate, and now sees $19 as a reasonable starting point for 2025.
PRICE ACTION: In morning trading, shares of Humana have tumbled over 14% to $301.41, UnitedHealth’s stock has dropped almost 7% to $456.45, and CVS Health (CVS), which owns Aetna, has slid about 9% to $72.32. Also lower are Agilon Health (AGL), and Alignment Healthcare (ALHC).
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