Medicare Advantage Cuts Don’t Bite: Health Insurers’ Stocks Rally

Late Friday, after the stock market closed, the Centers for Medicare & Medicaid Services (CMS) announced proposed new rates for Medicare Advantage plans. These are Medicare plans that are run by private insurers that give seniors more choices than they have under traditional Medicare Part A (hospital) and Part B (physician) benefits.

ObamaCare is largely funded by cuts to Medicare, especially Medicare Advantage. However, the Administration has not squeezed rates as much as anticipated. Last year, announcing 2014 rates, CMS surprised by increasing rates by 3.3 percent, leading to a rally in insurers’ share prices. At the time, AHIP, the insurers’ trade association, announced that:

CMS has taken an important step to help stabilize Medicare Advantage at a time when the program is facing significant challenges. We are currently reviewing the final rate announcement and will continue to work with policymakers in both parties to strengthen this critically important part of Medicare that provides high-quality, affordable coverage to more than 14 million seniors and people with disabilities.

AHIP later determined that the 2014 rate change was a cut of 6 percent, and responded to last Friday’s announcement with concern that the proposed cuts will be “devastating“. How big will the 2015 cuts be? The headline figure is 1.9 percent, but Wall Street analysts quoted by AHIP’s spokesman gave ranges of cuts from 4 percent to 9.3 percent.

After digesting the news, investors pushed the stocks up on Monday. With the S&P up 0.62 percent on Monday, health insurers significantly outperformed:

  • Humana, Inc. (HUM) ― up 10.57%
  • HealthNet, Inc. (HNT) ― up 4.75%
  • UnitedHealth Group, Inc. (UNH) ― up 2.98%
  • WellPoint, Inc. (WLP) ― up 2.69%
  • CIGNA, Inc. (CI) ― up 2.39%
  • Aetna, Inc. (AET) ― up 1.95%

Comments (16)

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  1. Cristina R says:

    With all these meandering and adjustments to the mandates, it is clear that there are some hidden interests with the healthcare reform. It is concerning that the administration is announcing something and then act differently than what they previously stated. These discrepancies have led to rallies in the stock prices. I find it very curious and convenient that this is happening. I expect the Securities and Exchange Commission (SEC) takes a look at this situations that are occurring.

  2. Brent N says:

    In one year, the S&P 500 has increased by 23 percent:
    The most important public health insurers have outperformed the market in the same period.

    Human, Inc. stock has increased by 62.82 percent.
    HealthNet, Inc. increased by 32.98 percent.
    UnitedHealth Group, Inc. increased by 41.96 percent.
    WellPoint, Inc. increased by 45.74 percent.
    CIGNA Inc. increased by 35.30 percent.
    Aetna, Inc. increased by 53.80 percent.

    This is a time of uncertainty for the insurers, so this dramatic increase in their stock prices is questionable. I don’t believe that without all of the government’s tweaks these stocks would have performed as good as they did. For me this screams hidden interests of the administration or government officials.

  3. Paulsen K says:

    Government intervention and regulation drives away investors. One wonders why they are investing in health insurance companies when the future is uncertain.

  4. Ricky S says:

    Bubble! The insurance companies are going to be the next bubble. This bubble is being inflated with the support of the government and ignored by regulators. Because this is what we need, a bubble with a weak economy, in a sensible industry and that affects every American. I really don’t understand what is going on through the minds of our elected officials.

  5. Veronica F says:

    Let’s seek equality by decreasing the quality of life of the average American and increasing the returns to rich investors. This is the reason why Obama was elected. It is wonderful to see policies backfire. America disappoints me.

    • James M. says:

      America is the one being subjected to this nonsense. Obama and our government are the ones you should be disappointed with.

  6. Micks says:

    Since medicare advantage is an alternative for Plan A and Plan B, cuts to this program will not be that catastrophic. Besides, the attitude of government is still swaying between the options.

  7. Franz S says:

    Destroy the plan that works so that people don’t have something to compare Obamacare to. That way regardless of how bad is the program, it will be better than nothing.

  8. Barry Carol says:

    The health insurers have lobbyists too — AHIP.

  9. John Fembup says:

    I think the mystery is not what the public knows – the mystery is what the public does not know that is pushing stock prices upward.

    Why might Medicare Advantage remain a favorable product for insurers? Three reasons I can think of are (1) seniors prefer Medicare Advantage to original Medicare with Medicare Supp (almost 30% of seniors are now enrolled in Medicare Advantage), (2) the likelihood for even greater future enrollment (seniors now “aging in” to Medicare have been covered for years under managed care plans and are not afraid of them), and (3) the industry’s continuing success in bringing down costs for seniors in Medicare Advantage.

    Aetna’s CEO in January was somewhat bullish about Medicare Advantage, in remarks he made to CNBC: (sorry about the ad)

    Bertolini’s key statement, it seems to me, is that the industry has succeeded in reducing its Medicare Advantage costs, from 114% of the baseline of original Medicare only 4 years ago, to 106% – “and it’s going to 100”. If true, that would create margin that would largely if not entirely absorb the federal payment reductions announced for 2015.

    So I say, the rise in insurers’ stock prices after the 2015 Medicare Advantage payments were announced probably means there’s something important that the public does not yet know. Although it’s possible there is something that the market does not yet know – I think that’s less likely.