After the U.S. announces Medicare Advantage plan rates for federal coverage, Humana shares surge

Investing.com - According to a research report released Tuesday by Wells Fargo Securities, the U.S. government’s final rates for the 2027 Medicare Advantage (MA) program came in significantly higher than early proposals, sending shares of Humana Inc (NYSE:HUM) sharply higher on Tuesday.

The Centers for Medicare & Medicaid Services (CMS) said it increased its expected rates for 2027 by 2.48%, up significantly from the nearly flat 0.09% increase in the preliminary notice.

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CMS’s latest decision ensures that private health insurers will receive incremental federal Medicare Advantage plan reimbursements of more than $13 billion from the federal government in 2027.

Wells Fargo analysts said the 239-basis-point improvement signals a “material” shift that brings health plan profit margins back onto a solid footing. The report said the main driver of the rate increase was CMS’s decision to drop a controversial risk model revision proposed in the initial notice.

The analysts wrote: “There’s been a significant improvement in the final 2027 Medicare Advantage plan rule, which gives us more confidence that the plans can improve profit margins.” While the average improvement between the preliminary and final rules is typically around 100 basis points, this year’s jump of nearly 240 basis points surprised the market.

The report estimates that, after considering a “normal coding trend” of 2% to 3%, the implied revenue growth rate for publicly traded insurers is currently 6.0% to 6.5%.

While this is still slightly below the 7% cost trend estimated for Medicare Parts A and B, the analysts said the gap is manageable. The report said insurers can bridge the gap by “modestly cutting benefits,” which would make the outlook for improved profitability in 2027 clear.

Despite the improved outlook for Medicare Advantage, Wells Fargo remains cautious about other segments of the managed care industry. The report said that while they are “clearly most optimistic about Medicare Advantage,” there is still significant uncertainty in Medicaid and the health insurance exchanges.

This update provides much-needed clarity for major insurers that have invested heavily in the private-sector versions of government seniors’ health plans. Over the past year, the program has faced increasing regulatory and cost pressures.

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