(Bloomberg) -- Humana Inc. said it needs more details to gauge the impact of a new Medicare policy that threatens to claw back billions from health insurers, but investors have decided it’s not nearly as bad as they feared.

With more than 5 million Medicare Advantage members, Humana is the second-largest seller of the private plans for seniors and it has the most at stake in government audits aimed at reclaiming overpayments. Administering health plans for the government program accounted for almost 80% of its $93 billion in revenue last year.

Despite the audit threat, Humana executives are sticking to their earnings target for 2025 announced last year. It’s a sign that the regulation —  decried as “fatally flawed” by the industry lobbying group — doesn’t meaningfully threaten Humana’s profits in the medium term. Meanwhile, the company’s shares jumped the most since September on Tuesday and were little changed Wednesday, when the company said it beat fourth-quarter earnings expectations. 

Medicare’s audit rule aims to recover $4.7 billion from the industry in payments over 10 years. The regulation, first proposed more than four years ago, is being closely analyzed for how it will affect Humana and competitors including UnitedHealth Group Inc. and CVS Health Corp.

The government’s rule “did not provide the details needed to fully understand the potential impact of the future audits,” Chief Executive Officer Bruce Broussard said on a call with analysts Wednesday, the first detailed public remarks from an insurance executive since the government published the regulation Monday.

‘Accountability’ Move

Health and Human Services Secretary Xavier Becerra said the regulation, called risk-adjustment data validation or RADV, would begin “to move us in a direction of accountability” in Medicare Advantage, a fast-growing program that makes up a rising share of the managed care industry’s profits.

Health insurers’ shares fell when the rule was released Monday after normal trading hours. They bounced back in Tuesday’s session — with Humana rising 5.5% — as investors surmised the regulation was less injurious than they’d braced for.

Medicare plans get paid more for enrolling sicker members. Whistleblowers and the Department of Justice have accused several of Humana’s competitors of fraudulently exaggerating how sick their member patients are to maximize Medicare Advantage payments, and government watchdogs have highlighted risks from the program. The companies have disputed the allegations. 

The new regulation sets out how government auditors will review data on patient illnesses and recover excess payments that aren’t justified by their medical records, and it has a lot for insurers to dislike. It doesn’t include any leniency for errors in patient diagnostic data that they said is needed to make the assessments a fair comparison to the traditional Medicare program.

“We are considering all our options to address or challenge this omission,” Broussard said. Before the rule was published, Humana indicated that element of the policy would trigger a lawsuit if finalized.

The government also plans to audit samples of patient records and extrapolate results, magnifying the impact of the reviews. Companies still need details on that process to understand its impact, Broussard said.

Delayed Start

In a crucial concession to companies, though, the extrapolation will only apply to audits of payments from 2018 and later. The Centers for Medicare and Medicaid Services is still finalizing audits as far back as 2011. For those earlier years, the government will recover payments only for those patient records it reviews directly, dramatically limiting the impact to industry.

Insurers would owe $683 million in overpayments for the 2011 to 2013 period if the agency extrapolated findings from those audits, but CMS “will not exercise our authority to seek” those recoveries, the agency said in the regulation. 

Instead, it will recover merely $8 million a year on average for that period — less than the cost to taxpayers of performing the reviews. The decision made the financial impact “negligible” for that period, analysts led by Whit Mayo of SVB Securities Research wrote. Without the extrapolation, Humana Chief Financial Officer Susan Diamond said the audits’ impact for those years would be immaterial.

The regulation will have more teeth starting with audits for 2018, when CMS expects to get back about $479 million annually. The government won’t begin to collect on the bulk of those recoveries until 2025.

Even with the extrapolations, the dollars at stake represent just 0.2% of Medicare Advantage’s total payments. It could be just a 1% to 2% drag on Humana’s earnings in 2025, according to SVB’s Mayo, and effect other insurers that are more diversified even less.

By some estimates, the government is allowing insurers to keep billions in improper payments. It hasn’t collected any money from the Medicare Advantage audit process since reviews of the 2007 payments. The Medicare Payment Advisory Commission, which counsels Congress, estimates that the way private plans bill for patient illnesses inflated payments by $91 billion since 2007.

Outside of the audit process, CMS can reduce Medicare Advantage payments to adjust for this, but so far it’s only applied the minimum adjustment required by Congress. “Given the financial status of the Medicare program, it is imperative that CMS act now to fully account for the impact” of plans’ approach to billing for patient illnesses, MedPAC said in a letter to the agency last year.

HHS declined to say whether the agency would change the adjustment.

“We’re taking a close look at how the Medicare program operates,” Becerra said in a call with reporters Monday, “to make sure that taxpayers are getting what they expect.”

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