Health insurers had predicted big, painful changes for many of their Medicare Advantage customers after the federal government said in February that the amount it pays per person for the popular coverage could fall more than 2 percent in 2014.
The Centers for Medicare and Medicaid Services then changed course on Monday and said it now expects that the cost per person to climb more than 3 percent.
"That's a huge positive" for the industry, said Sheryl Skolnick, an analyst who covers health insurers for CRT Capital Group.
The shares of several health insurers rose sharply in extended trading Monday following the CMS announcement. Medicare Advantage plans have become a key source of growth for insurers, which receive about $10,000 per member to provide customers with basic Medicare coverage topped with vision or dental coverage, or premiums lower than standard Medicare rates.
Insurers offer hundreds of different Medicare Advantage plans around the country, and they flood TV airwaves each fall with commercials during the annual open enrollment period for the popular plans.
More than 13 million people were enrolled in Medicare Advantage plans last year, or about 27 percent of the Medicare population, according to the Kaiser Family Foundation. That total has nearly doubled since 2006.
Many Medicare Advantage plans will ultimately get paid less next year due to several other variables like a premium tax that is called for in the health care overhaul, the massive federal law that aims to cover millions of uninsured people. Analysts also expect insurer profits from the plans to be strained by the growing cost of care.
But their finances won't be squeezed so tightly that they have to chop benefits, raise rates by large amounts or leave markets entirely, as some on Wall Street initially feared.
"I think what CMS did here was to buy stability for the program," said Dan Mendelson, president of the market analysis firm Avalere Health. "Most beneficiaries will not see dramatic changes going forward into next year."
The trade association America's Health Insurance Plans had launched an intense lobbying and marketing push after the initial CMS announcement. It included television ad campaigns entitled "Drastic" and "Too Much."
But the association said Monday that CMS with the final 2014 rate announcement took an important step "to help stabilize Medicare Advantage at a time when the program is facing significant challenges."
Some health insurance stocks had retreated since the CMS announcement in February. Shares of Humana Inc., for instance, had fallen more than 10 percent as of late last week. Medicare Advantage plans account for more than 60 percent of the Louisville, Ky., insurer's revenue.
Humana shares climbed more than 9 percent, or $6.78, after markets closed Monday to $81.80. Shares of the largest Medicare Advantage plan provider, Minneapolis-based UnitedHealth Group Inc., rose 4 percent, or $2.28, to $61.25 after hours.