Medicare Shock Hits Healthcare Stocks: CMS Pulls the Reimbursement Rug as UnitedHealth Craters Through Key Support

U.S. healthcare services stocks were hit hard overnight after a Wall Street Journal reported revealed that the Centers for Medicare and Medicaid Services (CMS) plans to raise Medicare Advantage reimbursement rates far less than the market had been expecting. The initial report triggered a sharp selloff across the group, which intensified once CMS formally confirmed the proposal. Shares of UnitedHealth Group, Humana, CVS Health, and other Medicare-heavy insurers fell sharply, reflecting investor concern that a key earnings tailwind for the sector has abruptly reversed.

The CMS proposal calls for average Medicare Advantage payment rates to rise by just 0.09% in calendar year 2027, equivalent to roughly $700 million in additional industry-wide payments. That figure landed dramatically below analyst expectations, which had clustered in the 4% to 6% range following a 5.06% increase granted for the current year. In effect, CMS is signaling a pause—if not a reset—in reimbursement growth at a time when insurers are still grappling with elevated medical cost trends, policy changes tied to the Inflation Reduction Act, and tighter margins across government-sponsored programs.

Why this is so damaging for service providers comes down to operating leverage. Medicare Advantage is a core profit engine for the large managed-care players, particularly UnitedHealth, Humana, and CVS. These plans rely on reimbursement increases not only to offset rising utilization and medical costs, but also to support benefit richness, pricing discipline, and margin stability. A near-flat rate environment forces insurers to absorb cost inflation internally or pass it along to beneficiaries through narrower benefits or higher premiums—neither of which is viewed favorably by investors or regulators.

Compounding the issue, CMS also proposed eliminating a controversial but lucrative billing practice tied to risk adjustment. Under the proposal, insurers would no longer receive payment credit for diagnoses derived from so-called “unlinked” chart reviews—diagnoses not associated with an actual medical encounter such as a physician visit. CMS estimates that this change alone reduces the projected 2027 payment rate by approximately 1.53 percentage points. Government watchdogs have long argued that these practices inflated payments without improving care, and CMS made clear it does not want risk adjustment to serve as a competitive advantage for certain plans. For insurers that leaned heavily on these practices, the proposal represents a direct hit to revenue and margin assumptions.

UnitedHealth Group’s earnings report, released against this policy backdrop, did little to stabilize sentiment. The company reported fourth-quarter adjusted earnings of $2.11 per share, in line with consensus, on revenue of $113.22 billion, modestly below expectations. While the headline results were not disastrous, investors focused squarely on guidance. UnitedHealth forecast 2026 adjusted earnings of more than $17.75 per share on revenue above $439 billion. While the EPS outlook was technically in line with consensus, the revenue guide fell meaningfully short of the Street’s roughly $454 billion expectation, reinforcing fears of slower growth in the company’s largest businesses.

The market reaction was severe. UnitedHealth shares fell roughly 12% premarket, extending a sharp decline that has now taken the stock from the $350 area down to roughly $295. From a technical standpoint, this move represents a disruptive downside gap—often a sign of a regime shift rather than a short-term overreaction. Such gaps are notoriously difficult to recover from quickly, as prior support levels tend to become resistance and investor confidence takes time to rebuild.

Fundamentally, UnitedHealth’s results highlight the pressures facing the entire group. Medical cost ratios rose sharply year over year, reflecting higher utilization, Medicare funding reductions, and Inflation Reduction Act impacts. While management emphasized steps taken to rebase operations, improve pricing discipline, and strengthen transparency—particularly within Optum—the near-term earnings narrative remains clouded by policy risk. Optum Health, in particular, saw a meaningful year-over-year earnings decline, underscoring the sensitivity of integrated care models to reimbursement dynamics.

Looking ahead, the CMS timeline will be critical. The current proposal is part of the CY 2027 Advance Notice, which is subject to a public comment period running through February 25, 2026. CMS will review feedback from insurers, providers, and industry groups before issuing the final Rate Announcement on or before April 6, 2026. Historically, CMS has made adjustments between the advance notice and the final ruling, often modestly improving rates as additional data becomes available. However, given the agency’s clear emphasis on payment accuracy, risk adjustment reform, and cost containment, expectations for a dramatic upward revision appear low.

Between now and April, investors should monitor several key milestones: industry lobbying efforts during the comment period, any revisions to the underlying actuarial assumptions used by CMS, and signals from the administration about broader healthcare policy priorities. Updates related to Medicare Advantage Star Ratings, Part D payment changes, and risk adjustment methodology could also influence final outcomes and stock performance.

In the near term, the message from the market is unambiguous. CMS policy risk has reasserted itself as a dominant driver for healthcare services stocks, overwhelming otherwise solid earnings execution. Until there is clarity—or relief—on reimbursement trajectories, the group is likely to remain volatile, with rallies viewed skeptically and valuation multiples under pressure.