Insurers, Investors Should Have Seen Medicare Cuts Coming

By FOXBusiness

A proposal late last week by the Obama administration to scale back payments to an important segment of the government’s Medicare program should have come as no surprise either to participating insurers or investors in those companies.

Continue Reading Below

And indeed, after an initial selloff early Tuesday, the stocks of Humana (NYSE: HUM), which had fallen more than 11% in early trading, and UnitedHealth Group (NYSE: UNH), down early around 6%, had both bounced back significantly later in the day.

“My view is that they should have seen this coming. The market should have seen this coming,” said Uwe E. Reinhardt, a healthcare economist at Princeton University.

Reinhardt said private insurers have profited handsomely for years from their participation in Medicare Advantage, a program in which commercial insurers provide Medicare coverage to millions of elderly Americans. In fact, the government had historically sweetened payments to the plan as an incentive for private insurers to participate, he said.

"If you go to bed with the government eventually they kick you out of bed."

Uwe. E. Reinhardt, Princeton University healthcare economist

Now, under the Affordable Care Ace enacted in 2010, the government is scaling back on some of those incentives, Reinhardt explained.

On Friday, the Centers for Medicare and Medicaid Services (CMS), an arm of the Health and Human Services Department, said payment rates for Medicare Advantage plans will fall by a proposed 2.2% in 2014.

The healthcare reform law (aka Obamacare) “zeroed in” nearly three years ago on payments made to private insurers that participate in Medicare, explicitly calling for reductions, said Reinhardt. Now the insurers are facing the “pain of drawing down this subsidy,” he said.

“Ultimately you knew it was coming and now it’s here. It was more than expected. If you go to bed with the government eventually they kick you out of bed,” Reinhardt said.

The CMS said Medicare Advantage participants will benefit from their proposal by paying lower premiums and deductibles and through more efficient care provided by their insurers. The CMS claims that since 2010, when Obamacare passed, Medicare Advantage premiums have fallen by 10% while enrollment is expected to climb by 28% by the end of the year.

Unprofitable Plans 

The insurance industry is already fighting back against the proposed cuts.

Karen Ignagni, president of America’s Health Insurance Plans, an industry trade group, released a statement Tuesday that read in part: “The proposed changes to Medicare Advantage payments are a crushing blow to the 14 million seniors and people with disabilities who count on this critically important part of Medicare. The combined effect of the ACA cuts and new proposed payment changes will likely result in seniors facing higher out-of-pocket costs, reduced benefits, and fewer health care choices.”

Ignagni said the cumulative impact of the cuts proposed by CMS would reduce Medicare Advantage payments by more than 8%, or about $11 billion, next year.

At least one Wall Street analyst believes the cutbacks will be materially harmful both to insurers that participate in Medicare Advantage and seniors enrolled in the program.

Citigroup healthcare analyst Carl McDonald wrote in a research note that the cutbacks could “turn almost every plan in the industry unprofitable.”

“If implemented, these rates and the program changes CMS is suggesting would be enormously disruptive to Medicare Advantage, likely forcing a number of smaller plans out of the business and creating disarray for many seniors,” McDonald wrote.

Reinhardt disagrees, saying the insurance industry would adapt to the changes, just as it has always adapted to rate changes in the past.

“The Medicare business … the profit margins on it had been very good (for a long time) and it added a lot to the bottom lines of these companies,” he said, specifically citing Humana and UnitedHealthcare. “Now they’re getting hit on their top lines and they have to pay out more on their premiums.”

He described the CMS rate cut proposal as a “forced redistribution” in which ultimately, in his view at least, the elderly will benefit by paying lower deductibles and premiums.

Reinhardt said his advice to the insurance industry is to “take it on the chin and ultimately work around it.”

The proposal is open to public comment for 45 days with the final plan to be announced on April 1. In other words, the insurance industry has 45 days to convince the government to scale back the cuts.