Federal Medicare payments unexpectedly adjusted upward! The “bonus” of the 2027 rate level sparks a surge in the U.S. healthcare insurance sector.

Zhitong Finance App learned that U.S. health insurance companies’ shares collectively rose in pre-market trading on Tuesday on the heels of the U.S. government’s announcement that it plans to increase the payment rates for 2027 Medicare Advantage programs for Medicare beneficiaries in the United States by far more than market expectations.

In pre-market trading Tuesday U.S. Eastern Time, shares of UnitedHealth (UNH.US), a healthcare insurance industry giant, surged 6.9%. CVS Health (CVS.US), Elevance Health (ELV.US), Centene (CNC.US), Molina Healthcare (MOH.US), and other leading health insurers saw share gains ranging from 3.6% to 6%. Notably, Humana (HUM.US), an insurer that has long focused on federal Medicare business, saw its share price jump more than 11% directly in pre-market trading, becoming the best-performing stock in the S&P 500 index in pre-market action.

It is understood that the Centers for Medicare & Medicaid Services (CMS) said late Monday local time that it will increase the payment level of private insurance companies offering Medicare Advantage plans to U.S. seniors by an average of 2.48% for 2027, significantly higher than the 0.09% increase it proposed in January.

In a latest research report, an analyst team from RBC Capital Markets said that this increase is clearly higher than their previously most optimistic expectations of 1% to 1.5%.

“We believe this revision is more about correcting an actuarial error than CMS taking a more relaxed stance toward MA discipline,” said an analyst team from Jefferies, a Wall Street financial giant, in a report.

An official from Medicare’s institutional business division, in a call with reporters, said that insurers will also receive an additional 2.5% positive tailwind due to adjustments to risk assessment-linked risk evaluation payment methods, so the total increase is about 5%.

CMS said that this upward adjustment will bring more than $13 billion in additional payment benefits for Medicare Advantage federal healthcare plans in 2027.

Government payment rates affect insurers’ benchmark pricing for monthly premiums and what benefit initiatives they can offer in the plans, as well as how much profit they can ultimately earn. These health insurers will also use these rates to prepare their bidding for Medicare Advantage plan contracts they will sell in 2027. For insurers that have long relied on Medicare Advantage business, this amounts to an official upward revision of the profit side, and the magnitude is clearly higher than what Wall Street originally expected; as a result, stocks such as Humana, CVS, and Elevance will be quickly repriced.

Medicare Advantage (that is, Medicare Part C) is, in essence, a seniors’ health insurance program funded by the government and underwritten and managed by private insurance companies. Enrollees do not use the traditional federal Medicare plan directly; instead, they join commercial insurance plans approved by Medicare. Such plans must cover Medicare Part A and Part B, and usually bundle in prescription drug coverage Part D as well. Many products also include additional benefits such as dental, vision, or fitness—benefits that traditional Medicare may not necessarily cover.

Therefore, Medicare Advantage can be understood as: federal healthcare funds flow to commercial insurers, and the latter handle product design, doctor networks, benefit allocation, and medical cost management. KFF, a nonprofit health policy research organization, noted that Medicare Advantage has already covered more than half of eligible Medicare beneficiaries. This means it is no longer a marginal supplement, but one of the core profit pools in the U.S. health insurance commercial model.

The official Medicare Advantage payment rate directly determines what price insurers can bid for 2027 products, whether they can maintain or expand benefits, whether they need to raise premiums, and ultimately how much underwriting profit they can retain. Over the past period, the market has been worried that rising healthcare utilization among seniors and higher drug and diagnosis/treatment costs would erode these companies’ profit margins. But with this payment rate increase, it is essentially giving the industry a much thicker “profit buffer cushion” before cost pressures have fully disappeared.