2014, which could lead to reduced coverage or fewer options for people buying the plans.
The Centers for Medicare and Medicaid Services said Friday after markets closed that it expects costs per person for Medicare Advantage plans to fall more than 2 percent in 2014, a bigger drop than many analysts who cover the industry anticipated.
The government uses this figure as a benchmark to determine payments for these privately run versions of the government's Medicare program that covers the elderly and disabled people, and analysts worry that this might lead to big payment cuts.
Medicare Advantage plans could see payment reductions topping 5 percent, considering they also face cuts from the health care overhaul and from the steep federal budget cuts known as sequestration that are slated to start next month. Plus, their profits also are expected to be pressured by a premium tax imposed to help fund the overhaul, which aims to cover millions of uninsured people.
"There's no way around it. The proposed Medicare Advantage rates for 2014 are really, really bad," Citi analyst Carl McDonald said in a research note, adding that big cuts could wipe out smaller competitors and leave customers with less choice.
Medicare Advantage plans have become a key source of growth for insurers, who are paid to provide customers with basic Medicare coverage topped with vision or dental coverage, or offer premiums lower than standard Medicare rates. UnitedHealth Group Inc. and Humana Inc. are the two largest providers of the plans.
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.
While the CMS announcement on Friday may have scared some investors, it doesn't guarantee that customers are doomed to premium hikes or skimpier benefits in 2014 because insurers have had to slash costs. CMS will announce final rates in April, and analysts say the government will likely find ways soften the blow.
The government needs Medicare Advantage plans to help cut costs and reform health care, said Dan Mendelson, president of Avalere Health, a market analysis firm.
The privately run plans negotiate reimbursement with providers to rein in costs, something regular Medicare does not do.
Mendelson said government officials have to make sure Medicare Advantage providers are being fiscally responsible, but they also have to ensure that funding reductions don't hurt their business models.
The actual rate changes that customers eventually see will vary, depending on factors like a plan's quality rating or where the plan is located.
"It's like a calculus puzzle, I mean, there are six or seven variables at least," said Les Funtleyder, a health care strategist at the private equity fund Poliwogg.
Among insurers, Humana's stock fell more than 6 percent, or $5, to $72.99 in Tuesday afternoon trading, and UnitedHealth shares dropped 93 cent cents to $56.39, while broader trading indexes climbed slightly. Humana derives a larger portion of its revenue from Medicare Advantage than UnitedHealth.