Health Insurance

Humana shares rally as Medicare rate cuts not as bad as feared


Shares of Humana surged more than 7 percent to a historic high Monday after one of the leading providers of Medicare Advantage plans said proposed health department rate cuts may be more benign than anticipated.

After the market close Friday, the Centers for Medicare and Medicaid Services released its advanced proposal for . During its conference call earlier this month, Humana officials had projected that the cuts would mean a 6 percent to 7 percent reduction.

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"The potential impact of CMS's proposed changes to the calculation of Fee-for-Service (FFS) costs are now expected to result in a funding decline for 2015 of 3.5 to 4.0 percent," the company told investors in a regulatory filing.

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CMS will issue its final rate decision in April. Last year, the agency lessened its initial proposed 2014 rate cut after intense lobbying from industry officials and advocates for elderly health issues, such as AARP. Another intense appeal to avoid further cuts is already underway this year.

But Citi analyst Carl McDonald cautioned that a smaller rate cut will still pose headwinds for insurers in 2015.

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"Even if rates are a bit better than Humana's guidance, the industry will still be dealing with another a pretty significant drop in Medicare reimbursement next year that will make it difficult for the Medicare-focused plans to achieve their targeted earnings growth rates," he wrote in a note to clients.

The S&P Managed Care sector rallied over 3 percent in early trade, led by gains in Humana, United Health Group, Health Net and WellPoint.

—By CNBC's Bertha Coombs. Follow her on Twitter @berthacoombs.