The Centers for Medicare & Medicaid Services (CMS) unveiled on Monday its proposed methodological changes and payment policy updates for Medicare Advantage that are set to influence payments in 2027. These proposals emphasize program sustainability, improved accuracy, and administrative simplicity while forecasting only a marginal increase in payment rates going forward.
This announcement notably impacted the share prices of several prominent U.S. health insurers, including Alignment Healthcare (NASDAQ: ALHC), Centene Corporation (NYSE: CNC), CVS Health Corporation (NYSE: CVS), Elevance Health (NYSE: ELV), Humana (NYSE: HUM), Molina Healthcare (NYSE: MOH), and UnitedHealth Group (NYSE: UNH).
CMS’s release of the Calendar Year 2027 Advance Notice details the planned methodological changes for measuring Medicare Advantage capitation rates along with Part C and Part D payment policies. This annual process is integral for updating payment rates and refining the technical assumptions underlying the Medicare Advantage program’s financial structure.
According to the proposal, the overall effect would be a net average year-over-year payment increase of only 0.09%. While seemingly minimal, this translates to an additional $700 million flowing to Medicare Advantage plans nationwide, demonstrating the scale of the program despite the restrained growth rate.
Notably, this proposed rate increase fell significantly short of expectations. Analyst forecasts had anticipated a Medicare Advantage payment growth falling roughly between 4% and 6% for 2027. The discrepancy primarily stems from a lower spending growth estimate applied by federal actuaries to traditional Medicare costs, which directly sets the foundation for Medicare Advantage payments.
Historically, actuaries revise this growth estimate as additional data are incorporated prior to finalizing payment policies in April each year. At present, the growth assumption stands at approximately 4.97%, lower than anticipations from several market analysts.
When further elements such as estimated risk score trends that relate to coding practices and beneficiary population shifts are factored in, the calculated average increase in payments climbs to 2.54%. This adjustment reflects the complexity of accurately capturing beneficiary health risk and the influence it holds over plan funding.
The CMS detailed that the Effective Growth Rate (EGR) — a critical metric in setting Medicare Advantage payment benchmarks — embodies projected growth in Original Medicare per capita costs as estimated by the Office of the Actuary. This metric is central to aligning payments with actual healthcare expenditure patterns.
CMS Administrator Mehmet Oz commented on the proposals, stating, "These proposed payment policies are about making sure Medicare Advantage works better for the people it serves. By strengthening payment accuracy and modernizing risk adjustment, CMS is helping ensure beneficiaries continue to have affordable plan choices and reliable benefits, while protecting taxpayers from unnecessary spending that is not oriented towards addressing real health needs." This statement underscores CMS’s dual focus on beneficiary outcomes and fiscal responsibility.
As part of its strategy to enhance program integrity, CMS also introduced updates to the Part C risk adjustment model. Guided by the principles of reducing administrative complexity, supporting equitable competition across plans, and ensuring payments accurately reflect health risks, the agency plans methodological recalibrations.
Specifically, the proposed model would maintain the use of version 28 of the clinical classification system but recalibrate it with contemporary Original Medicare data. This entails updating both diagnosis and expenditure years to better align payment determinations with current cost realities.
A significant policy shift includes the exclusion of diagnoses derived from audio-only encounters and from unlinked chart review records starting in 2027. While plans would retain the ability to submit such records, these diagnoses would no longer factor into risk adjustment calculations, promoting consistency and data reliability.
Regarding the Program of All-Inclusive Care for the Elderly (PACE), CMS confirmed intent to fully transition risk adjustment to utilizing encounter data system metrics. For 2027, a phased approach would blend risk scores evenly between the traditional 2017 CMS-HCC model and the new 2027 model, smoothing the shift for affected organizations.
Underpinning its geographical considerations, CMS indicated that policies affecting Puerto Rico would largely continue existing practices. This approach aims to sustain stability in a market where Medicare Advantage enrollment markedly exceeds that in other jurisdictions.
On the prescription drug side, the CMS proposals included risk adjustment updates to reflect the latest Inflation Reduction Act provisions and recent data trends. Moreover, refinements are targeted to enhance predictive accuracy in prescription drug plans under Part D.
Finally, the Advance Notice detailed proposed initiatives and solicited feedback regarding Part C and Part D Star Ratings. While the current proposals are preliminary, any substantive changes would require separate rulemaking processes in the future.
The immediate market reaction to these announcements was significant. Leading health insurer stocks experienced steep declines during premarket trading on Tuesday:
- UnitedHealth Group (UNH) dropped 13.13% to $305.48.
- Alignment Healthcare (ALHC) fell 15.20% to $20.19.
- Centene Corporation (CNC) decreased 7.28% to $42.91.
- CVS Health (CVS) declined 11.41% to $74.30.
- Elevance Health (ELV) was down 7.14% to $350.00.
- Humana (HUM) slipped 15.03% to $224.00.
- Molina Healthcare (MOH) dropped 6.04% to $188.91.
These sharp market movements reflect investor concerns regarding the implications of the CMS proposals for Medicare Advantage revenues and margins in 2027 and beyond.
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