(Bloomberg) -- The soaring profits that US health insurers have enjoyed in recent years from fast-growing government programs are at risk of stalling.

Imminent changes to Medicare and Medicaid may mean lower profits and slower growth, threatening to temper the robust trajectory of the big companies that operate taxpayer-funded health plans for older and low-income Americans.

In early April, regulators are set to change rules that helped drive a decade-long surge of enrollment into the popular Medicare Advantage program, a private insurance option for older Americans. And a pandemic-era measure that added millions of low-income Americans to insurers’ Medicaid plans is coming to an end April 1, which will lead to millions of people losing the safety-net coverage and falling off insurance rolls.

One industry-backed analysis has suggested the Medicare changes will cut payments to plans by 3.4% in 2024, a meaningful amount given the scale of the business: The program paid health plans $403 billion last year. Executives are trying to assure investors that they're prepared. For businesses that are increasingly built around government programs, health insurers face a future with slower growth unless they come up with new business avenues.

Investors are recalibrating. Shares of the largest companies in the sector — UnitedHealth Group Inc., Elevance Health Inc., Cigna Group and Humana Inc. — hit record highs late last year, but they've lagged the broader S&P 500 index so far in 2023. An index of health-insurer stocks has outperformed the benchmark in eight of the last 10 years, often by wide margins.“Any time you get in business with the government, you run the risk of becoming nothing more than a public utility,” said Spencer Perlman, director of health-care research at Veda Partners, a policy research firm. “You’re going to be highly regulated, and your rates are going to be regulated in some form or fashion as well.”

Government Growth

States have turned to private companies to manage their Medicaid programs, a health insurance program for low-income Americans which became a big business for insurers like Centene Corp. and Elevance. During the pandemic, the government halted routine Medicaid checks in which they determined if people still met the eligibility criteria. Those checks will resume in April. More than 90 million people will have to go through the process and as many as 14 million could lose coverage. Companies are trying to get people who lose Medicaid to join more profitable insurance plans offered through employers or the Affordable Care Act marketplaces, but it’s unclear how many will.

The bigger risk, though, will come from Medicare. While the traditional business of selling health benefits to employers stagnated, an aging population and favorable payment rates drove enrollment in privately managed Medicare Advantage health plans for seniors and people with disabilities. Now, about half of all people on Medicare opt to get their benefits through private insurers, a market of almost 30 million people that’s doubled in the last decade.

Medicare has propelled revenue and membership at the largest insurers. At Elevance, revenue from government business has grown five-fold in the last decade. Humana, which gets 80% of its revenue from Medicare Advantage, is leaving the employer medical coverage market entirely to focus on government programs. 

Humana’s Chief Executive Officer Bruce Broussard has told investors his company is positioned for “for a strong 2024, irrelevant of the rate notice,” even as the company has warned in comments to CMS of “unintended consequences that negatively impact the benefits available.” The company urged a delay for some changes. Humana is the second-largest Medicare Advantage provider. The proposal didn’t alter its earnings-per-share estimates for 2025.

It’s easy to see why Medicare in particular is an attractive market: The potential for profit is higher, with far bigger gross margins per enrollee than every other insurance line of business, according to an analysis from the Kaiser Family Foundation, a health research nonprofit.

Seniors who sign up for Medicare Advantage plans agree to use an insurer’s network of doctors and hospitals and accept limits on care, like getting approval for certain drugs or procedures. In exchange, they get benefits such as lower out-of-pocket expenses, zero premiums, dental and vision coverage — even gym memberships and transportation to visits.

• Read more: Private Medicare Insurers Blasted by Warren for Driving Up Costs

Industry groups argue that the Centers for Medicare and Medicaid Services’ proposed changes will hurt vulnerable seniors, including low-income people who rely on both Medicare and Medicaid, as well as people with multiple chronic conditions. About half of those on Medicare Advantage have incomes of less than $25,000 a year, and about half of Black people and Latino people on Medicare opt for this program, according to data from the industry group Better Medicare Alliance.

The industry has launched a public relations and lobbying campaign to raise alarms about the harm companies have said Medicare Advantage changes will cause seniors, framing it as a cut to Medicare — a claim the Biden administration has rejected. The Better Medicare Alliance has spent $12.5 million on television and mobile ads since Dec. 27, according to data from AdImpact, including one spot that ran during the Super Bowl in Washington, DC.

Coding Correction

Proponents of the changes have argued that they’re a long overdue correction to a program that’s enriched private insurers at the expense of taxpayers. Concerns have escalated for years that Medicare Advantage plans improperly exaggerate how sick their members are to inflate the rates they get paid and lawmakers from both parties are raising alarms. A growing list of federal audits and civil cases has alleged that some insurers falsify diagnoses for profit. The Justice Department has brought lawsuits against UnitedHealth, Elevance, Cigna, Kaiser Permanente and others. The litigation is ongoing and the companies have disputed the allegations.

• Read more: Major Insurers Are Scamming Billions from Medicare, Whistleblowers Say

Meanwhile, overseers have said the program costs taxpayers more for each enrollee than traditional Medicare. The way private plans maximize the diagnostic codes leads to “tens of billions of dollars in excess payments to MA organizations annually,” raising costs for taxpayers and beneficiaries in the traditional program, according to the Medicare Payment Advisory Commission, which counsels Congress. The group has estimated plans will reap $44 billion from the strategy in 2022 and 2023. The Biden administration recently finalized audit rules that will claw back about $4.7 billion payments for diagnostic errors over a decade. The policy will largely give insurers a pass on payments made before 2018.

The Medicare Advantage rate update set to be completed by April 3 would eliminate payments linked to many diagnoses. The industry has said those changes, proposed for 2024, will mean less money for the doctors who serve Medicare Advantage patients through business arrangements that put doctors on the hook for a patient’s total medical spending. UnitedHealth, in particular, has sought to buy physician groups to turn expenses for its insurance business into revenue. The company, in comments to CMS, said Medicare’s proposed changes will cut funding for physicians in these arrangements by about 20% to 25%. The company also said the proposal oversteps the agency’s legal authority, suggesting a possible court challenge if it’s finalized.

The companies do have flexibility to adapt. Plans can maintain the generous benefits they’ve offered in recent years to attract customers if they lower administrative costs and profit. Or they can protect their margins and pass costs on to members, potentially hurting their growth. Medicare Advantage “has been a highly profitable, high-growth market,” said Morningstar analyst Julie Utterback. While the rate changes may make it less attractive, the impact on companies “really depends on how these insurers decide to compete.”

--With assistance from Alexander Ruoff.

©2023 Bloomberg L.P.