Insurer shares could gain if Medicare cuts less than proposed

Wed Mar 27, 2013 6:37pm EDT

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March 27 Reuters) - Planned cuts in U.S. government payments for private Medicare Advantage insurance may not be as severe as first proposed, a prospect that could boost the shares of insurers such as Humana Inc (HUM.N) and UnitedHealth Group Inc (UNH.N).

The government is expected to announce on Monday final details about the proposed rates for the private health insurance program for seniors and the disabled which has 14 million members.

Analysts see a chance reductions to 2014 payments the government will make to insurers who run the program could be less than expected, given risks too steep a cut could make firms drop certain coverage.

A congressional agency said in a memo that it believed Health and Human Services Secretary Kathleen Sebelius has the legal latitude to change her view on how to calculate the payments, potentially making the reduction less onerous.

Susquehanna Group analyst Chris Rigg said the decision could go either way, and could mean a 10 percent swing higher or lower in the share price of Humana, whose Medicare Advantage business accounts for about two-thirds of revenues.

"It's impossible to predict," Rigg said.

The proposed reduction follows administration efforts to reduce how much money it pays private insurers as an incentive to participate in Medicare Advantage. Officials say they are bringing the payment rates for Medicare Advantage more in line with traditional fee-for-service Medicare. L1N0BSIYL

On February 15 the government proposed a Medicare Advantage payment reduction of 2.3 percent. Including the cuts in doctor rates, the plan amounted to an 8 percent cut worth $11 billion, according to the insurance industry trade group. Wall Street says the insurers may stop offering Medicare Advantage plans if the government does not temper its reductions.

The Congressional Research Service looked at the legal issues around the way the government could calculate doctor payments in 2014 for Medicare Advantage patients and sent a memo to Congress on March 26. The government's proposed plan was based on expectations of steep cuts in Medicare payments to doctors, which would allow the government to pay insurers less for Medicare Advantage because their costs would fall.

In the past, these proposed Medicare cuts of 25 percent to 30 percent in doctor payments have been overridden by Congress. If the government decides to account for this so-called "doc fix" in its formula for Medicare Advantage, it could make the proposed rate reduction less severe.

Joe Antos, a health policy expert at the conservative American Enterprise Institute in Washington, believes there is a good chance the government agency will roll back the proposed cuts.

"The prospect of numerous plans dropping participation in marginal markets is pretty ugly," he said. "I thought the initial notice was saber-rattling, with some relief in the final rule proving that this administration is actually reasonable."

The initial announcement was a surprise to investors. Shares in Humana dropped sharply in the following days and are now trading near their recent lows at $68.20, a drop of about 13 percent from before the announcement. UnitedHealth has largely recovered.

UnitedHealth shares rose 1.7 percent, or 97 cents, at $56.62 on Wednesday.

Humana rose 3 percent to $68.72. During the last month, insurers intensely lobbied against the Medicare Advantage cuts, aiming a broad television campaign at seniors with this kind of private Medicare insurance.

Should the government stick with its original payment cut proposal, insurers will seriously consider dropping their Medicare Advantage business for 2014, CRT Group analyst Sheryl Skolnick said in a recent interview.

"That's why the plans are really turning up the efforts to lobby Congress to get the pressure put on the agency to do what it's done in the past and calculate a rate that would allow the plans to operate," Skolnick said.

Humana and UnitedHealth declined to comment.

(Reporting by Susan Kelly in Chicago, David Morgan in Washington D.C. and Caroline Humer in New York; editing by Andrew Hay)

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