In a reversal that followed intense lobbying from the health insurance industry and members of Congress, the U.S. government said it will increase the payment rate for health insurers that offer coverage through the popular Medicare Advantage program.
The Centers for Medicare & Medicaid Services said on Monday it will increase the rate by 3.3% in 2014, reversing a 2.3% cut announced in February.
The turnaround boosted shares of major health insurance companies such as Humana Inc in after-hours trading.
Medicare Advantage provides care for seniors who select to receive their Medicare benefits through private insurance plans. About 14 million Americans are enrolled in the program.
The program has long ensured industry participation by paying more than the cost of the traditional Medicare program for the elderly and disabled. The proposed reduction had followed efforts by the Obama administration to reduce how much money it pays private insurers as an incentive to participate.
In announcing its final rates for 2014 on Monday, CMS said the changes came "after careful consideration of public comments."
"The policies announced today further the agency's goal of improving payment accuracy in all our programs, while at the same time ensuring program stability and preserving beneficiary choice," Jonathan Blum, acting principal deputy administrator for the CMS, said in a statement.
Since the initial rate announcement in February the agency, part of the U.S. Department of Health and Human Services (DHHS), has encountered weeks of heavy lobbying by health insurers, whose share prices dropped sharply on the planned rate cut.
Some insurers hinted they would drop their Medicare Advantage business for 2014 if the government did not back down.
Lawmakers on both sides of the aisle took those concerns on board. More than 160 of them joined an effort to reverse the previously announced rate cut, according to America's Health Insurance Plans (AHIP), which launded Monday's decision.
AHIP has released several lawmaker letters expressing worry about the proposed Medicare Advantage payment cuts, including three last week from bipartisan members of the New York House delegation; the entire Massachusetts House delegation, all Democrats; and six other House Democrats.
"We have concerns that if CMS does not make this adjustment, many Medicare Advantage enrollees in Massachusetts, and across the country, will face higher premiums and fewer benefits," said the Massachusetts delegation's letter, which was addressed to Marilyn Tavenner, acting CMS administrator, and dated March 27.
Earlier in March, a large bipartisan group of senators highlighted the threat of plans potentially exiting the Medicare Advantage market altogether.
Meanwhile "The Coalition for Medicare Choice," which is funded by AHIP and other private insurers, launched a full-throated attack on the proposed cuts through television advertising and social media.
It urged seniors to call their U.S. senators to complain, and posted on its website a study by consulting firm Oliver Wyman that warned of a "significant amount of upheaval" if the original 2014 rate plan went through.
"This includes the potential for plan exits, reductions in service areas, reduced benefits, smaller provider networks, and reduced Medicare Advantage enrollment as beneficiaries see a significant decline in plan value," the firm said.
The new growth rate assumes a 0% change for the 2014 physician fee schedule, the so-called "doc fix," by taking into account the likely congressional override of a scheduled physician payment reduction, the agency said.
In the past, proposed Medicare cuts of 25% to 30% in doctor payments have been overridden by Congress.
The Congressional Research Service on March 26 sent a memo to Congress saying it believed Health and Human Services Secretary Kathleen Sebelius had the legal latitude to change her view on how to calculate the payments, potentially making the reduction less onerous.
CMS said Medicare Advantage would remain a "strong option" for beneficiaries, noting enrollment in the program has risen 25%, while premiums have fallen, since enactment of the Affordable Care Act, President Barack Obama's signature healthcare law, in 2010.
Shares of Humana, a major provider of Medicare Advantage plans, rose 8% in after-hours trading from a close Monday of $75.02. Shares of UnitedHealth Group Inc climbed 4% from Monday's close of $58.97. Shares of Aetna Inc rose 2.6% from their close of $52.38.
"We believe this final rate notice provides insurers with enough flexibility to produce adequate margins for participation," BMO Capital Markets analyst Jennifer Lynch said in a note to clients.