LIVE MARKETS-What the new Medicare Advantage plan may mean for insurers

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WHAT THE NEW MEDICARE ADVANTAGE PLAN MAY MEAN FOR INSURERS

In the wake of the Trump administration's proposal for a much smaller-than-expected increase to 2027 Medicare Advantage rates and a subsequent drop Tuesday in health insurer shares, Morningstar says investors should expect to hear more from managed-care organizations on the issue and how the companies might offset it in their earnings over time.

But Morningstar Senior Equity Analyst Julie Utterback says in the note that for now rates have yet to be finalized for 2027 and the firm is not yet changing its fair value estimates on the "four-star" managed care organizations.

"While a low-single-digit run on Medicare Advantage rates would pressure Morningstar's fair value estimates in the long term, fair values are not currently changing because these rates have yet to be finalized for 2027," according to the Morningstar note.

"Investors should take note this initial notice is typically not finalized until April, meaning the flat 2027 rate may rise," it added.

Morningstar said it had already incorporated lower Medicare Advantage margins into its models due to the potential for new regulation.

Still, the firm noted that a low-single-digit run rate on Medicare Advantage rates "in the long term" would probably pressure fair values.

"We currently assume that MA rates increase in the mid-single digits over the long run, so a permanent cut in MA rates to about 2.5% and further pressure on MA margins could trim roughly mid-single to low-double-digit percentages off our fair values on the big MA insurers."

At the same time, a 2.5% rate increase for just one year before returning to mid-single-digit rate increases for the big Medicare Advantage insurers - while considering the lower Medicare Advantage concentrations at the other managed care organizations - "would likely result in immaterial changes to valuations."

Shares of UnitedHealth UNH.N, CVS CVS.N and Humana HUM.N - all of which have meaningful exposure to Medicare Advantage - are down sharply on Tuesday.

UnitedHealth on Tuesday said it expects 2026 revenue to exceed $439 billion, which would be a 2% decline, reflecting previously announced cuts across its businesses. That is also lower than analysts' average estimate of $454.6 billion, according to LSEG data.

(Caroline Valetkevitch)

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