Expect Medicare Advantage Changes in 2025

Medicare Advantage plan insurers are under fire, as I foretold in my Feb. 1 Bob’s Journal.

Barron’s recently expanded upon the situation in a cover story. The problems became apparent when Humana, a major provider of Medicare Advantage plans, reported higher costs and lower profits, reporting it expected those trends to continue.

While Advantage plans are more popular than ever, insurers are being squeezed. Plan members are incurring more medical care at higher costs than the plans estimated. Labor costs, of course, are rising.

In addition, a number of hospitals and other providers are severing relationships with Advantage plans because of the low payment rates offered by the plans. Government regulators also are impinging on Medicare Advantage plans. New restrictions were put on advertising for the 2024 enrollment season.

Recent government studies found that a number of Advantage plans were improperly denying care or treatment to members, forcing members to appeal decisions, do without care or pay for the care themselves. That’s leading to changes in rules regarding denial of care and appeals of denials.

The latest blow was delivered this week when the Centers for Medicare and Medicaid (CMS) announced its payments to Medicare Advantage plans in 2025 would increase 3.7% from 2024 rates.

While that’s an increase, it’s lower than the rate published previously in the advance notice from CMS. Historically, the final rate is higher, not lower, than the advance estimate.

In effect, insurers offering Advantage plans will receive lower payments from the government in 2025 than they expected.

Combined with the other changes, Advantage plans are likely to look different in 2025. Many will impose some mix of higher premiums, fewer services, reduced coverage and higher copayments and deductibles.

We won’t learn about the details of the changes for each plan until October 2024.

But those enrolled in Medicare Advantage plans or thinking about it should expect the offerings to look different next year than they do this year. You’re likely to need to spend more time this fall assessing your options and deciding which Medicare coverage to select.

Stock Market Surprises in the First Quarter

Stock indexes powered higher in the first quarter of 2024, but there were some surprises in the details.

The S&P 500 moved higher without support from Apple (AAPL), which has been a major driver of the index for years.

AAPL appreciated so much in the past that it became the largest capitalization company in the world and the biggest component of the S&P 500. At its 2023 peak, AAPL was more than 7% of the S&P 500. 

But over the 200 trading days ending March 26, AAPL declined more than 6% while the S&P 500 rose 21%. That’s the widest performance gap between the two since October 2013, according to Bespoke Investment Group.

Over the last 100 trading days, AAPL was down a fraction while the S&P 500 appreciated 24%. That combination hasn’t happened since 2001.

Tesla and Alphabet are other previous stock appreciation leaders that became laggards in the first quarter. 

I said a few months ago that the bull market was likely to broaden, leading to gains in stocks other than the Magnificent Seven that paced the indexes the last couple of years. That appears to be happening, making smaller company stocks and an equal-weighted version of the S&P 500 more attractive.

Likewise, while U.S. growth stocks dominated global investment returns in recent years, we started to see a change in the first quarter, and especially in March.

In the first quarter, the S&P 500’s return was exceeded by indexes in Italy and Japan. In March, six major country indexes beat the S&P 500.

Within U.S. markets, small-cap and mid-cap indexes had higher returns than the S&P 500. Value stocks had higher returns than growth stocks. The equal-weight S&P 500 handily beat the regular S&P 500. Those are all reversals of previous trends.

Technology was a middling performer in the first quarter and a poor performer in March. Sectors with higher returns than technology included energy, financials, materials and industrials.

We’ve had false starts toward a market rotation in the last few years, but I think the fundamentals are in place for a durable change in the market leaders.

Expect Lower Growth, More Disinflation from China

A few years ago, China decided to shift its emphasis from rapid economic growth to concentrate on other goals. Its leaders recently restated their commitment to the new goals.

In 2015, China announced that its key goals would be to lower debt, reduce the wealth gap, expand its global leadership and concentrate power in its “core leadership.”

In its recent annual Two Sessions policy planning meetings, the country announced it would continue with the 2015 goals and strategies.

Instead of seeking a high level of economic growth, the leaders want what they consider high-quality development, which they expect will come from technological innovation and advanced manufacturing.

While local governments and many Chinese companies continue to reduce their debt and leverage, the national government plans very little offsetting stimulus. Fiscal spending will increase modestly, and monetary policy will be steady.

This combination of policies means China won’t return to the high levels of growth that were common before the pandemic. Economic growth is likely to remain below 5% and could be well below that at times.

Inflation is unlikely to be a problem in China. In fact, deflation should be more of a concern and policymakers seem to recognize that.

The rest of the world, especially its Asian neighbors, is likely to feel the effects of these policies. There will be reduced demand from China for the commodities and goods it used in the overexpansion of real estate and manufacturing sectors under previous policies. 

But the government will continue to invest in and subsidize favored manufacturing industries. Those industries primarily will try to export their products. That’s likely to increase global supplies and continue the deflation in prices of those manufactured goods. 

In short, China’s policies are likely to reduce global growth and offset some inflationary pressures from other sources. 

The Data

The Personal Consumption Expenditure (PCE) Price Index rose 0.3% in February following a 0.4% jump in January. Over 12 months, the index was 2.5% higher through February and 2.4% higher through January.

The Fed’s preferred inflation measure is the core PCE Price Index, which excludes food and energy prices. That index rose 0.3% in February after gaining 0.5% in January.

Through 12 months, the core PCE Price Index was 2.8% higher through February after rising 2.9% through January.

Personal income rose 0.3% in February after rising 1.0% in January. Compensation increased but income from assets declined in February.

Despite the smaller increase in income, personal consumption expenditures climbed 0.8% in February, the largest monthly advance since January 2023, after rising 0.2% in January. 

The ISM Manufacturing Index increased to 50.3 in March from 47.8 in February. March was the first time in 16 months the index was above 50, which indicates the sector is expanding.

The ISM Services Index declined to 51.4 in March from 52.6 in February.

The PMI Manufacturing Index declined a little in March to 51.9 from 52.2 in February. This index has been above 50 for three months.

The PMI Services Index also fell in March to 51.7, from 52.3 in February.

The PMI Composite Index for the economy was 52.1 in March, down from 52.5 in February.

Pending home sales increased 1.6% in February, after declining 4.7% in January.

Pending home sales in February were 7% lower than 12 months earlier. In January, sales were 8.7% lower than 12 months earlier. 

The Consumer Sentiment Index from the University of Michigan increased to 79.4 at the end of March, the highest level since July 2021, from 76.9 at the end of February.

Sentiment regarding both current conditions and expectations increased.

Factory orders increased 1.4% in February after declining 3.8% in January. Excluding transportation, factory orders increased 1.1% in February and declined only 0.6% in January.

The Kansas City Fed Manufacturing Index was negative nine in March, down from positive three in February.

The third and final estimate of gross domestic product (GDP) found that it grew at a 3.4% annual rate in the last quarter of 2023.

That’s down from 4.9% in the third quarter but is the second-highest growth rate since the last quarter of 2021.

The private sector created 184,000 jobs in March, according to the ADP Employment Report. That’s up from 155,000 jobs in February.

Job openings increased modestly in February to 8.756 million from 8.748 million in January. That’s the third-lowest level of job openings in the last 12 months and well below the 9.850 million openings 12 months earlier.

New unemployment claims declined by 2,000 to 210,000 in the latest week. The high for the last 12 months was 265,000 claims last June.

Continuing claims, which lag a week behind new claims, increased to 1.819 million from 1.795 million.

The Markets

The S&P 500 rose 0.01% for the week ended with Tuesday’s close. The Dow Jones Industrial Average fell 0.31%. The Russell 2000 lost 0.33%. The All-Country World Index (excluding U.S. stocks) declined 0.13%. Emerging market equities gained 1.03%.

Long-term treasuries lost 1.51% for the week. Investment-grade bonds fell 0.51%. Treasury Inflation-Protected Securities (TIPS) decreased 0.28%. High-yield bonds retreated 0.26%.

On the currency front, the U.S. dollar rose 0.60%.

Energy-based commodities increased 2.84%. Broader-based commodities rose 2.68%. Gold gained 4.59%.

Bob’s News & Updates

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