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Medicare Shakeup: Policy Changes Rattle Big Insurers

by Team Lumida
May 17, 2024
in Macro, News
Reading Time: 4 mins read
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Key Takeaways

  1. Biden administration’s policy changes reduce Medicare Advantage profitability.
  2. Insurers like CVS and Humana face rising costs and declining profits.
  3. Market and regulatory challenges could reshape the future of Medicare Advantage.

What Happened?

The Medicare Advantage landscape has dramatically shifted. Medicare Advantage, a program where the government pays insurers to manage senior care, has been a major profit driver for companies like UnitedHealth Group and Humana. However, the Biden administration’s recent policy changes have altered the payment structures, causing a significant dip in profitability.

CVS Health’s Aetna unit reported a $900 million surge in unexpected medical costs, leading to its largest one-day share drop in nearly 15 years. As a result, CVS shares have plunged 26% this year, equating to a market cap of just over $70 billion—the same amount it paid for Aetna in 2018. Humana and UnitedHealth have also seen their shares drop by over 20% and 16%, respectively.

Why It Matters?

These changes have rattled investors and corporate boards, signaling a shift from growth to profitability in the Medicare Advantage sector. With the government tightening its purse strings and implementing stricter policies, insurers must adapt quickly. CVS plans to exit some markets and cut back on benefits to improve margins.

Thomas Cowhey, CVS Chief Financial Officer, stated, “The goal for next year is margin over membership.” This shift could open opportunities for companies with better profit margins like UnitedHealth to gain market share. However, the regulatory environment remains a tougher challenge, with tighter payment rates and changes in coding patient risk.

What’s Next?

Insurers are now focusing on mitigating rising costs and adapting to new regulations. Expect strategic exits from less profitable markets and reductions in member benefits. Analysts predict Humana, despite expected lower earnings this year, will rebound to $26 per share by 2026. The industry’s lobbying efforts will intensify to influence public and policymaker opinions.

Wendell Potter, a former Cigna executive, highlighted, “Companies will be investing heavily through campaign donations and lobbying.” A potential Donald Trump win in the upcoming presidential elections could favor privatization and benefit Medicare Advantage. Regardless, the sector remains profitable but without the extraordinary gains seen in recent years.

Source: WSJ
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Lumida's website (referred to herein as the "Website") is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of the Website on the Internet should not be construed by any client and/or prospective client Lumida’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet.

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‍Lead Capture Forms: By submitting your contact information in the forms on this site, you are not obligated to invest in Lumida's product or services.
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