There is big news out of the healthcare sector this month. It marks a dramatic opportunity for investors.
The Centers for Medicare and Medicaid Services (CMS) announced its intent to increase the amount the government disburses to insurance companies for its Medicare Advantage plan. Early this month, we learned that in 2014, payments to insurers under Medicare Advantage will go up by 3.3%.
That’s a dramatic turn of events from the original proposal that called for a rate decrease of 2.2 % next year. The government’s decision “significantly improved the 2014 outlook” for U.S. health insurers.
What Exactly is Medicare Advantage and Why Was Everyone in an Uproar?
Medicare Advantage plans gives care to seniors who want to get their Medicare benefits through private insurance plans.
For a long time, the program has guaranteed insurance industry participation by paying more than the cost of the traditional Medicare program for seniors and the disabled. The proposed cut announced in February was a part of the White House’s efforts to reduce the amount paid to private insurance companies.
However, many experts say the significance of these plans is that they create a more competitive Medicare market with lower costs for its participants.
Right now, about 14 million Americans are enrolled in the Medicare Advantage program.
How Did This About-Face Happen Regarding the Payment Process?
In February, CMS proposed substantial rate cuts to insurers for running the Medicare Advantage plans. They would have been an added layer of cuts that are already set to go in effect under Obamacare.
The insurance industry went crazy and rallied all the lobbying troops it could find on K Street. Some insurers openly stated that they may discontinue offering the plans if the rate decrease was implemented.
The efforts to fight the proposal created one the biggest industry campaigns in recent memory. What it also did was galvanize bipartisan support, something Congress hasn’t done in years. Lobbying efforts created a coalition of Democrats and Republicans to stop the cuts.
Industry lobbyists put together a grassroots movement of 50,000 seniors to contact members of Congress to relay their concerns about what could happen to their benefits. The result was that over 160 Congressmen signed letters in favor of changes more beneficial to insurers.
The legislative support gave the industry a big win – specifically in how CMS calculates the way it pays doctors and the insurers who run the plans.
In the past, calculations were made assuming that a cut in Medicare payments would take place. However, this cut never takes place because, year after year, Congress delays it.
Because of that idea, Health and Human Services (HHS) Secretary Kathleen Sebelius stepped in to change the payout equation – which opened the door for significantly lower proposed cuts and the 3.3% payment increase.
How Did the Industry React?
The healthcare sector is considered a “defensive play” during economic bad times. But with the announcement, many stocks in the industry moved higher in a big way.
The stock prices of Humana (NYSE: HUM), UnitedHealth Group (NYSE: UNH), Aetna (NYSE: AET), Cigna (NYSE: CI), and WellPoint (NYSE: WLP) all went up anywhere between 4% and 8% the Tuesday following the announcement.
Speaking of Humana, I wrote a piece on it back at the end of 2011. My take was that in a tumultuous period – which we were going through at that time – it was a great defensive play. But last week Humana, which has the greatest exposure to Medicare Advantage, spiked nearly 10% after the announcement.
When I say the greatest exposure, I mean it.
Humana receives 66% of its revenue and 58% of its profit from Medicare Advantage. UnitedHealth Group and Health Net Inc. (NYSE: HNT) each get about a quarter of their revenue from the plans. So what does this mean going forward?
Should the Announcement Be Your Catalyst to Jump Into Healthcare?
My point will be made if we focus solely on Humana for the moment. If you looked at the announcement and Humana in a vacuum, I would say jump in. However, when do we ever get to see an opportunity without other deciding factors?
In fact, Humana Chief Executive Bruce Broussard stated that there are still some “technical adjustments” within the announcement that could present problems in different parts of the country.
It was also brought up that other reductions in Obamacare will offset this payment increase while other adjustments could have a downright negative effect. The company released a press statement saying, “Market-by-market analyses will continue to be refined now that county-specific rate details have been issued.”
My thought on the matter is that the increase in health sector shares was a market reaction to just-released information. However, be cautious with insurers for a while and see what other pitfalls the Affordable Health Care Act have waiting for them. There could be more problems down the road that offset these current gains.
Good investing,
Jason
