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The Government Thinks It Is Overpaying for Medicare, Spelling Trouble for Insurers

Health insurers had a stellar 2022, but this year looks more challenging

Health insurers had the best of both worlds last year. Their stocks benefited from a rotation into value and their profits weathered the inflationary environment as healthcare utilization remained low.

But as managed-care companies kick off earnings season, sentiment has shifted. That isn’t because of what the most recent earnings will show. In fact, industry behemoth UnitedHealth Group Inc. earlier this month reported a 12% increase in revenue to $82.79 billion, topping analyst expectations. Yet that did nothing for the stock, which is down 8.2% for the year.

The trouble brewing for insurers centers around potential government action on Medicare Advantage, the private plans that have grown increasingly popular with seniors. The plans also are very profitable for insurers. A recent Kaiser Family Foundation analysis showed that average gross margins for Medicare Advantage plans were double those of plans in the marketplace and commercial group markets. But as more seniors switch to Medicare Advantage, questionable practices that drive up their profitability have come under increasing scrutiny and the federal government seems intent on making changes that could affect their bottom line.

For starters, the government will on Feb. 1 announce a revision to Medicare’s auditing system, known as risk adjustment data validation, or RADV. A seemingly humdrum tweak, it is keeping insurance executives up at night. Medicare in 2018 proposed several changes to the auditing process. Among them could be the exclusion of something called the fee-for-service adjuster, which allows for a permissible level of payment errors. Medicare also proposed applying the new policies retroactively. If the government goes ahead with the adjuster change, some industry chiefs have threatened legal action.

“If they take a position that an adjuster isn’t necessary like they did in the proposed rule,” Humana Chief Financial Officer Susan Diamond said at the JP Morgan conference earlier this month, “the industry is likely to resort to litigation as a way to ultimately resolve it, which will tie us all up in litigation probably for a number of years.”

The government could publish a watered-down rule—in fact, many Wall Street analysts think that will be the case. But, as Lance Wilkes from Sanford Bernstein warns, there is a persistent risk to Medicare Advantage because the Centers for Medicare and Medicaid Services ultimately believes it is overpaying. And the government has other ways to target Medicare Advantage, including through the 2024 rates it pays plans, which will be announced one day after RADV. Regulators could also consider other policy changes to things such as in-home assessments and Medicare marketing pitches, says Chris Meekins of Raymond James.

The biggest factor for the sector’s stocks in the near-term might actually be the Federal Reserve, though, not government regulators. Analyst Gary Taylor at Cowen recently examined what the three past monetary cycles did to insurers and the trend was clear. During the tightening cycles—2004 to 2006, 2015 to 2018 and March 2022 to the present—insurers were big outperformers. Conversely, the group tended to underperform as the tightening cycle ended.

With the market expecting the Fed’s hiking cycle to end sometime this year, we are approaching the time frame when, from a historical standpoint, companies such as UnitedHealth, Elevance Health (formerly known as Anthem) and Humana tend to lag behind the market. An adverse decision on Medicare Advantage could hasten that trend.

WSJ Reporter: David Wainer at



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