By Ludwig Burger

FRANKFURT (Reuters) -Shares in kidney dialysis group Fresenius Medical Care fell as much as 5% on Tuesday after a payment increase proposed by a major U.S. public health insurance body fell short of market expectations.

Analysts said the base-rate payment increase of 1.6%, proposed for 2024 by the Centers for Medicare & Medicaid Services (CMS) late on Monday, fell short of the 3% to 4% projected by the market.

"This further increases the challenge to meet 2025 targets as further savings may be required," Jefferies analysts said in a note.

Fresenius Medical, the world's largest provider of blood-cleansing treatments, is cutting costs and seeking to sell non-core businesses after U.S. staff shortages and cost inflation hit its earnings hard last year, compounding an existing burden from a high COVID-19-mortality rate among its patients.

This has also weighed on the performance of its parent Fresenius SE, triggering the healthcare group's decision to give up strategic control of Fresenius Medical.

Fresenius Medical shares were down 4% at 0814 GMT, erasing gains over the past three trading sessions.

The Germany-based company said it would assess the proposal and provide feedback to CMS within the 60-day deadline.

"Generally speaking, we have only assumed a moderate increase in Medicare payments for our 2025 margin targets," it said in a statement.

The group is targeting a 2025 operating income margin over sales of 10% to 14% in 2025, up from 7.9% in 2022.

CMS regulates U.S. government coverage of dialysis services for people with kidney failure, accounting for about 35% of Fresenius Medical's group sales, according to analysts at Credit Suisse.

The analysts added that the final decision on payment adjustments tend to be slightly more favourable for dialysis providers. The company said the final rate decisions was expected in the autumn.

(Reporting by Ludwig Burger; Editing by Maria Sheahan and Louise Heavens)