Healthcare Reform and Health Insurers

• Date: April 06, 2010
• Source: Admin

After months of legislative limbo on U.S. healthcare reform, health insurers such as Humana Inc and UnitedHealth Group Inc are bracing for more fallout from Washington over their Medicare plans.

The U.S. government body that oversees the Medicare program for the elderly is expected on Friday to release its preliminary decision on 2011 payment rates for privately run Medicare Advantage plans.

Last year, the Standard & Poor's Managed Health Care index of large insurers <.GSPHMO> tumbled 11 percent after the 2010 rate released by the Centers for Medicare & Medicaid Services (CMS) came in lower than analysts had expected. Companies across the industry have cited Medicare payment rates that they receive from the government as one reason they will struggle or fail to grow operating earnings this year.

Ipsita Smolinski, a senior health policy analyst at Capitol Street Research, projects the government will either keep the rate flat or call for a slight increase, but notes that Wall Street expectations range from a decline of 2 percent to a 2 percent increase.

"There is significant investor interest on this rate notice," Smolinski said. "You're in a new year where healthcare reform has not yet passed -- it's dwindling on life support -- so there is quite a lot of confusion in the marketplace."

CMS weighs many factors in determining rates, including expected and past Medicare medical costs and adjustments for coding that can significantly affect payments.

Another possible complicating factor in projecting the rate is that health reform legislation had sought to use savings from Medicare Advantage to help pay for changes. The loss of a Senate supermajority by President Barack Obama's Democratic Party last month has thrown the future of that reform into doubt.

The fate of reform remains the biggest question for investors in health insurance companies, said First American Funds analyst Tim Nelson, but "there's so many different moving pieces now relative to managed care valuations."

The rate ruling is "clearly one of those events," he said. 

MORE CUTS TO COME?

Medicare Advantage has been one of the main growth areas for the health insurance industry, as high unemployment erodes membership in its main business of employer-based health plans.

The 10.2 million beneficiaries enrolled in Medicare Advantage last year is nearly twice as many as in 2003, and make up 23 percent of the 45 million people enrolled in Medicare, according to the Kaiser Family Foundation.

Many analysts believe the program could become less desirable as the government looks to reduce or eliminate subsidies for the plans.

"While we believe the senior sector represents one of the most attractive long-term segments of health insurance, we believe that the market is underestimating the potential short-term difficulties in the Medicare Advantage program," Barclays Capital analysts said in a recent report.

Indeed, some took the surprise rate decision last year as a sign of more cuts to come under the Democrats.

"Looking from the long-term, I think these rates come down," said Morningstar analyst Matthew Coffina.

Of large insurers, Humana is the most leveraged to Medicare Advantage, with 64 percent of its expected 2011 premium revenue from the plans, according to JPMorgan analysts.

UnitedHealth, another huge Medicare player and the industry's largest company by market value, is expected to take in 26 percent of its premiums from Medicare Advantage. Healthspring Inc is among the smaller companies with major leverage to Medicare.

Private Medicare Advantage plans get subsidies, with the idea that they will offer broader benefits to seniors who enroll.

Last year, Medicare Advantage payments were 14 percent higher than for the government-run, fee-for-service Medicare plan, according to an independent committee that advises Congress on Medicare.

Medicare paid about $12 billion more in 2009 for the beneficiaries enrolled in Medicare Advantage plans than if they had remained in government Medicare, according to a June report from the committee, known as MedPAC.

The 2011 announcement comes as the prospect of more limited healthcare reform measures that could alter the insurance market keeps a cloud over the industry.

One uncertainty, Capitol Street's Smolinski said, is that the bills had sought to use savings from Medicare Advantage cuts to pay for reforms, which could sway CMS' decision for next year's rates.

"If rates are already lowered to the plans, then you just have a lower baseline and you have less money you can take from them" as part of reform, Smolinski said.

The rate decision could also offer a signal that CMS could take a harder line on Medicare payments for other industries, such as nursing home or home health companies, Smolinski said.

"There's a concern that if health reform doesn't pass, that CMS is going to be a more activist regulatory body, and they will go ahead and lower rates not just for Medicare Advantage plans," Smolinski said.

Source: Reuters, February 17, 2010