April 8 The Obama administration's announcement on Monday that it would roll back proposed cuts to privately managed Medicare plans is a positive for insurers because the final plan is "less worse" than the one proposed, Wall Street analysts said on Tuesday.
The government agency that oversees Medicare said after the stock market closed on Monday that on average, reimbursements to insurers for private Medicare plans would rise 0.4 percent, reversing what it said was a proposed cut of 1.9 percent.
Analysts who looked closely at the government's numbers saw an improvement of about 2 percent to 3 percentage points.
They also described an apples-and-oranges comparison between the government's and their calculations of the total impact. They said they saw a decrease in final payments of about 3 percent in 2015, versus their initial calculations of a cut of 5 percent or 6 percent.
Analyst Sheryl Skolnick of CRT Capital said the "less worse" results could lead to a bit of a relief rally in insurers' stocks on Tuesday morning.
"The market was assuming that the final rate would be better than the proposal, and that's what it got," Skolnick wrote in a note.
The move came after the Centers for Medicare and Medicaid Services came under pressure from the industry and a broad swatch of Republicans and Democrats in Congress to lessen the cuts after they were proposed on Feb. 21, saying they would hurt the older people who receive the benefits.
Each year, the government releases its formulas for determining how it will reimburse the insurers for plan members' procedures and doctor visits. Insurers use this information to decide on the markets where they will offer plans and what benefits they can provide.
Analysts said one reason for the gap between industry calculations and the government's figures was that analysts factored in a 1 percent insurance industry tax, while the government did not. Other reasons were not clear, they said.
Goldman Sachs analyst Matthew Borsch said in a research note that he was at a loss to explain this difference between the CMS rate announcement and industry estimates.
"That said, the key factor to bank for now is the amount of improvement in the rate, even if it turns out that CMS has overestimated the 'all in' rate impact," Borsch said in a research note. That improvement was about 2 to 3 percentage points.
As a result, he said, he raised price targets and increased earnings estimates for 2015 for Humana, UnitedHealth and WellCare Health Plans Inc.
Industry trade group America's Health Insurance Plans said late on Monday that the combined effects of a 6 percent cut in this year's benefits and the proposal for 2015 would affect the 15 million people who receive these privately managed benefits. The balance of the more than 50 million older and disabled people who use Medicare are in a different program run directly by the government.
"We remain concerned about the impact year-over-year cuts to Medicare Advantage would have on the high-quality, affordable coverage millions of seniors like and rely on today," AHIP President Karen Ignagni said in a statement. (Reporting by Caroline Humer; Editing by Lisa Von Ahn)