Medicare Shock Wipes $92bn From Health Insurers As Rates Barely Rise
CMS proposes 0.09% Medicare Advantage payment increase for 2027, far below analyst forecasts of 4-6%
Health insurers suffered their steepest single-day decline in years on Tuesday after the Centers for Medicare & Medicaid Services proposed a modest 0.09% increase in Medicare Advantage payments for 2027, dramatically undershooting Wall Street expectations and wiping approximately $92 billion in sector market value.
The proposal, released late Monday, marks a sharp departure from analyst forecasts that had anticipated payment increases ranging from 4% to 6%. The net average year-over-year increase translates to roughly $700 million in additional payments to Medicare Advantage plans, according to CMS announcement.
UnitedHealth Group, the largest Medicare Advantage provider, tumbled as much as 19%, while Humana, which derives roughly 80% of its revenue from the program, plunged 18.7%. Elevance Health fell 10.8% and CVS Health dropped 8.9%, as reported by Forbes. The declines were severe enough to drag the Dow Jones Industrial Average lower, given UnitedHealth's heavy weighting in the index.
The shortfall stems from federal actuaries adopting more conservative spending growth assumptions tied to traditional Medicare costs, rather than the more robust trends that insurers had anticipated. This gap between proposed rates and actual medical cost inflation threatens industry margins at a time when many payers were already grappling with elevated healthcare expenses.
"The disappointing rate notice would likely delay a potential double-digit earnings per share recovery for the industry in 2027," noted Mizuho analyst Ann Hynes. Baird analyst Michael Ha added that when comparing the proposed rates to cost trends, the increases appear "likely insufficient" and may force insurers to implement significant benefit reductions or exit certain markets to offset margin pressures in 2027.
The CMS proposal also includes changes to risk adjustment methodologies, including the exclusion of diagnosis information from unlinked Chart Review Records starting in 2027. This change is expected to have a disproportionate impact on Medicare Advantage organizations that rely heavily on such records for reporting risk-adjusted diagnoses.
Tuesday's selloff reflects growing concerns that the Medicare Advantage business model, which has driven industry growth and profitability for more than a decade, may face structural headwinds. Insurers had already begun scaling back their Medicare Advantage offerings for 2026 due to funding cuts and rising healthcare expenses, making the 2027 proposal particularly painful for investors who had been banking on a reimbursement rebound.
The proposed rates remain preliminary, with CMS typically issuing final payment rates in April. However, the magnitude of the miss—proposing a near-zero increase when analysts expected 4-6% growth—suggests that even revised final numbers may fall significantly short of industry hopes, leaving investors bracing for a prolonged period of pressure on health insurer margins and earnings growth.