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3 Reasons the Medical Advantage Reversal Doesn’t Matter

The dropping of planned cuts is only a short-term reprieve


When the Centers for Medicare & Medicaid Services (CMS) reversed course on planned Medicare Advantage cuts earlier this week, insurance and managed care stocks went wild.

Medicare Advantage, which offers better benefits through private insurers than are available under the traditional Medicare program, was — as of February — going to see rates cut 2.2% in 2014. CMS not only dropped the cut on Monday, but also raised next year’s funding by 3.3%.

These Stocks Will Rise to the Top in Q2
These Stocks Will Rise to the Top in Q2

It makes sense that shares in private insurance companies that offer such supplemental health coverage for seniors and disabled individuals — including Humana (NYSE:HUM), WellPoint (NYSE:WLP), UnitedHealth (NYSE:UNH) and Aetna (NYSE:AET) — would bounce on news of higher federal reimbursements.

Humana, the biggest Medicare Advantage player, has gained around 14% so far this week, while UNH is up 9%. AET and WLP have jumped 7% and 4% respectively.

But while insurance lobbyists can take a well-deserved victory lap — and the market’s unbridled optimism notwithstanding — the reprieve from funding cuts likely will be short-lived and thus have no impact on the program’s long-term health.

See, the real difference between the cut and the increase in funding is arguably a difference in assumptions. The growth scenario assumes Congress will act to prevent a 25% reduction in Medicare physician payments set to take effect in 2014.

CMS itself said that — despite the fact that Congress is likely to act in such a manner — “the assumption conflicts with the Office’s professional judgement that … the determination should be based on current law, not an assumed alternative.”

Plus, the Obama administration has been clear about its objectives to pare back the program from the start. In 2010, the CMS Actuary estimated that Medicare Advantage enrollment would be cut in half by 2017.

So regardless of whether this policy shift is the real deal or simply smoke ad mirrors, here are three reasons the recent Medicare Advantage reversal is hardly a game-changer for the space.

Medicare Advantage Still Faces $156 Billion in Obamacare Cuts: The prognosis for the long-term health of this popular program remains poor. To help pay for Obamacare, the Affordable Care Act (ACA) called for a total of $156 billion in Medicare Advantage cuts over 10 years. Monday’s policy reversal does nothing to roll back the 5% to 6% reduction set to take effect next year.

There’s No Band-Aid for the $100 Billion ‘Health Insurance Tax’: Beginning next year, health insurance companies will start paying new taxes that will total $101.7 billion over the next decade … and the first $8 billion is due next year. That premium tax increases to $14.3 billion in 2014 and will continue to rise annually. Insurance industry lobbyists warn that costs will have to be passed on to consumers, benefits likely will be cut and some Medicare Advantage plans may be closed. Even the non-partisan Congressional Budget Office estimates that the tax could result in 3 million fewer enrollees to the plan.

Sequestration Cuts Begin This Month: The industry is bracing for the across-the-board cut in Medicare reimbursements that kicked in on April 1 because lawmakers failed to avert “sequestration” cuts. All Medicare payments — including Advantage reimbursements — now are being reduced by 2% across-the-board. While that percentage seems small, the impact is huge given Medicare’s already low reimbursement rates.

All in all, CMS’ Medicare Advantage reversal makes the best of a bad situation in the short term for health insurers and their customers. But the program’s long-term prognosis is challenging — despite the fact that more than 27% of Medicare’s 47 million beneficiaries are enrolled and most give the plan high marks.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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