There is reason for optimism for investors in managed care health insurance companies going into next week's rate decision by the government on Medicare Advantage (NYSE:MA) rates. A positive outcome on rates will provide a short-term boost to the stock price of all managed care companies with Humana (NYSE:HUM) and Universal American (NYSE:UAM) benefiting the most due to their higher concentration in the MA business.
First some background:
The Center for Medicare and Medicaid Services (NYSE:CMS) is scheduled to release a final rate announcement for Medicare Advantage plans on April 1, 2013 for the plan year 2014. The advance notice released by CMS on February 15, 2013 was significantly negative cutting plan payments by 7-8% for 2014. Managed care companies generally sold off with HUM and UAM down more than 15% since the decision. The level of cuts in the advance notice spooked investors making them concerned about the long-term profitability of the plans (rate cuts fall mostly to the bottom line) and enrollment declines.
Based on my analysis of policy and politics around this issue I expect a substantial reversal from the advance notice. The government is likely to reverse the cut by as much as 1/3 to 1/2 of what was proposed in the advance notice. The final rate decline is likely to be in the 4% to 6% range. This will likely give a short-term boost to all managed care names as investors appear to be pricing in the worst case outcome.
My view rests on the following data-points:
· CMS indicated some flexibility by inserting some very unusual language into the advance notice: "We appreciate that plans are facing several legislatively mandated changes affecting payment for 2014, and this may present challenges for plans. We solicit comment on suggestions to address these challenges within the parameters of current law. In addition, we solicit comment on ways to modify requirements to improve opportunities for administrative efficiencies while improving delivery of care." Reading between the lines, I believe the agency is saying that we are not happy with what we are putting out so give us reasons to make it better. Several organization including the industry lobby, America's Health Insurance Plans (AHIP) have weighed in on the issue and suggested ways to mitigate the cut significantly. I believe CMS will adopt some of the suggestions of this powerful lobby.
· Politicians are coming under significant pressure from their constituents and from lobbyist to intervene. I'm seeing letters being written by powerful members of Congress to get CMS to reverse course. There are even TV ads going up in certain states. This level of public pressure usually gets the bureaucrats to sit up and take notice.
· Obama administration is looking to keep the insurance industry happy. There are signals being given by my sources here in DC that the White House will very much like the cooperation of the insurance industry prior to the expected heavy lifting that will be required to implement the Obamacare exchanges at the end of this year.Therefore the White House is expected to heavily lean on CMS to reverse course and give the industry a break.
Bottom line: The entire managed care universe including Aetna (NYSE:AET), Cigna (NYSE:CI), Healthnet (NYSE:HNT), United Health Group (NYSE:UNH) and WellPoint (WLP) are likely to have a good next week based on a better than expected decision by CMS. I would still expect HUM and UAM because of heavy MA concentration to benefit the most.
Disclosure: I am long UAM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.