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ANALYSIS-HMOs will be mainstay in Medicare for years
January 15, 2008 / 8:10 PM / 10 years ago

ANALYSIS-HMOs will be mainstay in Medicare for years

By Kim Dixon

WASHINGTON, Jan 15 (Reuters) - Health insurers, which took a major role in Medicare under Republican U.S. President George W. Bush, will likely remain a mainstay in the program for years to come, even if a Democrat wins the White House.

More than 9 million of the 44 million individuals in Medicare, the federal insurance for the elderly and disabled, are covered through companies such as Humana Inc (HUM.N). That figure is likely to grow to a quarter of all Medicare recipients within a few years, making big program changes much more challenging, and unlikely, analysts said.

"Not only does this add millions more voices to the discussion, it also dramatically increases the number of members of Congress with a vested interest in maintaining the current benefits," Carl McDonald, a health-care analyst at Oppenheimer & Co, said in an investor note.

At the same time, leading Democratic presidential contenders have focused on expanding coverage, which could boost the private sector’s role in government health programs, rather than dial it back.

Wall Street analysts are predicting healthy growth through at least 2010 for the private plans, in a rapidly expanding market as millions of baby boomers begin to retire this year.

The plans make billions of dollars in revenue from Medicare, making up about 31 percent of average company revenue, according to McDonald. Companies with the biggest relative Medicare business include Humana, HealthSpring HS.N, and WellCare (WCG.N).


Under conventional Medicare, government pays for care through a system letting patients choose doctors and hospitals. The private plans, known as Medicare Advantage, typically limit providers but offer more benefits, including drug coverage.

Private plans fled Medicare in the 1990s, citing payment rate cuts. To lure them back, the Republican-controlled Congress passed legislation in 2003 boosting payments to private plans. Enrollment has grown to 9.2 million as of January 2008, from 7.6 million in December 2006.

Critics, including many Democrats, called it "privatization" of Medicare and a give-away to private health insurers -- a view many still share.

But the leading Democratic presidential hopefuls, Senators Hillary Clinton of New York and Barack Obama of Illinois, say they will extend health insurance broadly. Clinton’s plan is seen as more ambitious as it requires individuals to have insurance.

"Arguably plans that are in the commercial space could benefit from a Democratic president because they want to expand health insurance," said Paul Heldman, a Citigroup analyst based in Washington.

Nearly 47 million people lack health insurance in the United States, up from about 40 million uninsured in 2000.

Both Democratic contenders’ plans build on the current system, according to Tricia Neuman, a Medicare expert at the nonpartisan Kaiser Family Foundation.

"There is a tremendous role for the private sector under almost every plan," offered by the major Democrats, she said.

Major changes in health care are notoriously slow to enact because of the system’s girth, and because of a payment system whereby insurers, hospitals and drugmakers are paid indirectly through employers.

Total U.S. health-care spending rose to $2 trillion in 2005, or 16 percent of gross domestic product, and is expected to rise to 20 percent of GDP within the next decade.


To be sure, Democrats will shine a brighter spotlight on payment rates to the private plans, creating at least "headline risk" to the stocks, with congressional hearings and the like, analysts said.

Both Clinton and Obama have criticized overpayments to private plans. The independent Medicare Payment Advisory Commission has reported the plans are paid about 12 percent more than government-administered Medicare.

"The overpayment issue is a big one and I‘m certain it won’t go away," said David Certner, legislative policy director at AARP, formerly the American Association of Retired Persons.

The issue is likely to rear its head again this year in Congress, but most analysts predict little movement during the year leading up to the 2008 presidential election in November.

"Even at current levels, there is support among Democrats (in Congress) for Medicare Advantage, which is why it would be really hard to cut payments," Heldman said. (Editing by Maureen Bavdek)

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