Impact of Healthcare Reform on Managed Health Care

• Date: April 06, 2010
• Source: Admin

Our fundamental outlook for the managed health care sub-industry for the next 12 months is positive. The uncertainty surrounding the prospects of whether there will be health reform has ended. The health reform package, which included the Senate health reform bill, was passed in the House of Representatives on March 21 and signed into law by President Obama on March 23. As we went to press, the reconciliation bill, which revises the Senate bill, was awaiting Senate approval. We view the health reform package as positive for managed care organizations (MCOs), on balance.

The MCOs will face fees totaling $67 billion over a 10-year period, which would be delayed until 2014 should the reconciliation bill become law. They also now face restrictions, including a ban on rescissions, no lifetime caps, the inability to bar coverage based on health status, and floors for medical-cost spending as a percentage of premiums (referred to as the medical cost ratio -- MCR, or medical loss ratio -- MLR), all of which can pressure margins. Also, Medicare Advantage (MA) plans, which provide managed care coverage for seniors, will face sharply lower premiums. But we also see offsets, including eventual enrollment gains of up to 32 million previously uninsured members, providing economies of scale and greater negotiating clout with providers. We believe MCOs will be able to better achieve the requisite MCRs by shifting medical-related G&A expenses to benefits expenses. In addition, we see potential opportunities for consolidation.

Meanwhile, we expect revenue growth in 2010 to remain modest, given commercial membership losses. The areas of growth we see are Medicare (MA and prescription drug) programs, given the rising senior population, and Medicaid programs, due to the high unemployment rate.

We also expect companywide MCRs to rise in 2010, as Medicaid and Medicare programs carry higher MCRs than commercial plans, and MA plans have a reduced premium rate in 2010. Many MCOs also face higher hospital utilization and unit costs, lately due to the H1N1 flu and new COBRA enrollment. COBRA is a program enabling laid-off workers to retain their health insurance through their former employer for up to 18 months as long as they bear their full cost, though most participants have been able to receive 15 months of federal government subsidies. All told, we look for a low single digit decline in EPS in 2010 for the group as a whole.

The S&P Managed Health Care sub-industry index rose 10.6% year to date to March 19, following 28.0% growth in 2009, while the S&P 1500 Composite Index grew 4.5% year to date, following 24.3% growth in 2009.

Source: http://www.standardandpoors.com