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Health insurance stocks surge on Medicare rate hike

April 2, 2013: 12:20 PM ET

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Shares of U.S. health insurers rallied Tuesday, after the Center for Medicare and Medicaid Services announced plans to increase the amount the government pays to insurance firms for its Medicare Advantage plan.

Investors and health insurance firms were notified late Monday that payments to insurers under Medicare Advantage will increase by 3.3% in 2014. That's a sharp turnaround from the original proposal, which called for cutting rates by 2.2%.

Analysts at Credit Suisse said the government's decision "significantly improved the 2014 outlook" for U.S. health insurers.

Shares of Humana (HUM), UnitedHealth Group (UNH), Aetna (AET), Cigna (CI), and WellPoint (WLP) rose between 4% and 8% Tuesday. Humana, which has the greatest exposure to Medicare Advantage, jumped nearly 10% at one point.

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Justin Simon, an analyst at research firm Heights Analytics, said the government's decision was likely done to curry favor with Senate Republicans and clear the way for the confirmation of acting CMS director Marilyn Tavenner.

"Medicare Advantage is a beloved program among the Republican Party," said Simon. "Our view is that this big of a revision has a lot more to do with a political extraction from Republicans and little to do with high quality analysis."

CMS has had six acting administrators since 2006, but none have been confirmed by the Senate. With many provisions of President Obama's Affordable Care Act starting to take effect later this year, it's critical for the administration to have a CMS chief confirmed by the Senate as soon as possible, said Simon.

CMS declined to comment.

The health insurance industry's main lobbying group, America's Health Insurance Plans, had also campaigned for rates to increase. The group cheered Monday's decision: "CMS has taken an important step to help stabilize Medicare Advantage at a time when the program is facing significant challenges," AHIP's president Karen Ignani said in a statement.

Some traders on StockTwits were caught off guard by the news and perhaps even a little bitter.

$UNH wow...i hate when companies we can all agree on despising go to all-time highs (congrats longs)

Many other traders questioned the bounce on the news.

A 5% increase over what was expected for a portion of revenue shouldn't equate to a 18% increase in price. Shorting it now... $HUM

$UNH i still remember machines beating this stock to low 50's on ceo comments inspite of stelar earnings.

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Maureen Farrell
Maureen Farrell
Staff writer, CNNMoney

Maureen Farrell is a staff writer at CNNMoney and covers Wall Street, banking, mergers and the stock and bond markets. Prior to joining CNNMoney, she covered venture capital and entrepreneurs for Forbes, and mergers and bankruptcy for Mergermarket and Debtwire, both divisions of the Financial Times.

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