The healthcare sector is always subject to regulatory and political risk — a wildcard that’s only been heightened with expanded coverage set to kick in next year. As much as the sector might benefit from extending healthcare coverage to another 30 million customers, er, citizens, it’s still subject to downward pricing pressure in the massive federal programs.
As we noted a while back, elsewhere in the sector, hospital stocks appeared poised for a good — but not great — year, partly because of the potential for lower Medicare spending next year.
Now the insurers are fretting about it, too.
The health insurance sector took a beating early Tuesday in an otherwise up market after Humana (NYSE:HUM) warned that the new federal healthcare law will cause Medicare Advantage payments to drop at a mid-single-digit percent rate — worse than a prior forecast for flat-to-slightly down. The $11 billion-market-cap insurer itself saw shares plunge as much as 11.7% at one point during the morning.
Here’s a passage from Human’s regulatory filing that really spooked investors:
“Humana is closely analyzing all operational avenues available to address those preliminary rates and the related impact upon the Company’s ability to grow both its Medicare membership and its earnings for 2014.”
Predictably, other big health insurance stocks followed suit. UnitedHealth (NYSE:UNH), WellPoint (NYSE:WLP), Aetna (NYSE:AET) and Cigna (NYSE:CI) all sold off in an otherwise session for U.S. equities.
Not that being down in an up market has become unusual for this group. Over the last year, these stocks — with the exception of Cigna — have seriously lagged the broader market. Just have a look at the chart, courtesy of S&P Capital IQ, below:
The Medicare Advantage rates, announced late last week, have wide-ranging implications for the health insurers. The Advantage program costs more that standard Medicare, but seniors get more premium services, making it very popular — and more remunerative for providers.
Humana alone has about 2 million Medicare Advantage customers out of a total pool of roughly 14 million signed up for the program. But with cuts coming on the government’s end, payments and enrollment is coming under pressure.
Indeed, according to the Congressional Budget Office, the Affordable Care Act will reduce federal spending on Medicare Advantage programs by more than $300 billion through 2022.
So, yeah, the insurers will have more customers, but more of those folks will have less profitable coverage.
The latest group sell-off is just another reminder that dysfunction in Washington and the far-reaching effects of implementing health-care reform will remain a major sector risk for a good long while.
As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.