The Government Thinks It Is Overpaying for Medicare, Which Could Spell Trouble for Insurers.

Health insurers had a great year last year. Their stocks benefited from a rotation into value and their profits weathered the inflationary environment as healthcare utilization remained low.
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As earnings season gets underway for managed-care companies, sentiment has shifted. This is not because of what the most recent earnings will show. In fact, UnitedHealth Group Inc., the industry leader, reported a 12% increase in revenue to $82.79 billion earlier this month, which topped analyst expectations. However, this did not boost the stock price, which is down 8.2% for the year.
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The potential government action on Medicare Advantage is causing trouble for insurers. Medicare Advantage is a private insurance plan that has become increasingly popular with seniors. These plans are also very profitable for insurers. However, as more seniors switch to Medicare Advantage, questionable practices that drive up profitability have come under scrutiny. The federal government seems intent on making changes that could affect the bottom line of insurers.
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The government will announce a revision to Medicare's auditing system on February 1. This seemingly minor change is causing anxiety for insurance executives. Medicare proposed several changes to the auditing process in 2018, including the exclusion of the fee-for-service adjuster. This would mean that a certain level of payment errors would no longer be tolerated. If the government goes ahead with this change, some industry leaders have threatened legal action.
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Humana's Chief Financial Officer Susan Diamond warned that if the government does not require insurance adjusters, the industry will likely resort to litigation, which could tie everyone up for years.
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There is a risk that the government will publish a watered-down rule on Medicare Advantage, according to Lance Wilkes from Sanford Bernstein. However, Chris Meekins from Raymond James warns that the government could also consider other policy changes that could target Medicare Advantage, such as changes to in-home assessments and Medicare marketing pitches.
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The biggest factor affecting the sector's stocks in the near term may actually be the Federal Reserve, rather than government regulators. Analyst Gary Taylor at Cowen recently examined the impact of three past monetary cycles on 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.
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As the market anticipates the Fed's hiking cycle to end at some point this year, we are getting closer to the time frame when, based on historical patterns, companies such as UnitedHealth, Elevance Health (formerly Anthem) and Humana typically fall behind the market. A negative ruling on Medicare Advantage could speed up that trend.