People receive their second COVID-19 boosters in Waterford, Michigan
A nurse fills up syringes with the coronavirus disease (COVID-19) vaccines for residents who are over 50 years old and immunocompromised and are eligible to receive their second booster shots in Waterford, Michigan, U.S., April 8, 2022. Reuters

The U.S. government announced on Friday a lower than expected 1.1% average cut of 2024 reimbursement rates for health insurers that offer coverage through the Medicare Advantage program, boosting shares of the market's largest players.

It improved the rates it would pay insurers after pushback from the industry, which contended the government was cutting reimbursement rates by too much for them to adequately serve older people enrolled in their plans.

The U.S. Centers for Medicare and Medicaid (CMS) said it expected total payments for next year to rise by 3.3% from 2023, or around $13.8 billion, up from its 1% initial estimate, and reduced drops on some costs resulting from rule changes.

Health insurers who operate Medicare Advantage plans have come under pressure after the government last month proposed new rules for an audit program to avoid overpaying them.

The agency said in its final rates announcement on Friday it would phase in the revision over three years and estimated it would result in a smaller drop during the first year.

"The policies finalized in this Rate Announcement will help make more accurate payments. This reduces incentives to cherry-pick healthy beneficiaries and discriminate against sicker patients," CMS said in a statement.

UnitedHealth Group Inc and Humana Inc shares were up more than 2% in after-market trade. Elevance Health Inc shares were up nearly 2%, while CVS Health Corp and Cigna Group shares were up by over 1% after hours.

The companies are among the largest players in the Medicare Advantage market in which private insurers are paid a set rate by the government to manage member healthcare.

The government payment rates affect how much insurers charge for monthly premiums, plan benefits and ultimately, how much they profit. Medicare Advantage covers nearly half of the 65 million people enrolled in the government's Medicare program for people aged 65 and older or disabled.

Estimated cuts resulting from the risk model revision in the CMS initial proposal had insurers facing an average 2.3% effective drop in payments, potentially costing the industry $3 billion.

The agency pegged the spending increase in the traditional Medicare program, which in previous years was the main factor determining how much the agency pays Medicare Advantage insurers, at 2.3%, up from 2.1% in its initial proposal.

It estimated the risk model revision would result in a 2.16% drop, down from 3.12% in its initial proposal and kept its estimate for a separate drop in bonus payments at 1.24%.