Health Insurers Bounce on Lower-Than-Expected Medicare Advantage Cuts

Joel Anderson  |

Health insurers showed strength on Monday, the first day of trading after news broke that cuts to Medicare Advantage plans were in the offing. Medicare Advantage, a program through which private insurers can offer Medicare plans that cover Medicare parts A and B and receive compensation from the federal government, has long been expected to be the victim of cuts.

However, Humana (HUM) announced Monday that the rate cuts announced after market close on Friday were lower than initially expected. The cuts represent a 3.5–4 percent decline in funding as opposed to the 6–7 percent previously anticipated. The news had insurers making gains across the board, with Humana leading the pack with gains of almost 8 percent. United Health (UNH) also jumped over 2.5 percent, Cigna (CI) over 1.5 percent, Aetna (AET) over 2 percent, and WellPoint (WLP) over 2.5 percent.

Cuts Intended to Bring Costs in Line with Traditional Medicare

The proposed cuts are not final and should be subjected to adjustments based on negotiations between the Centers for Medicare and Medicaid Services (CMS) and the insurance industry as well as further estimates on what costs may be created by heath care reform.

“The final cut may be bigger, as the proposed rate doesn’t take into account adjustments required by the Affordable Care Act,” said analyst Michael Manns in a phone interview with Bloomberg.

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Medicare Advantage plans currently serve close to 16 million people, almost one third of those on Medicare roles. The 2014 rates were increased by 3.3 percent despite an initial proposal for a 2.2 percent cut. Medicare Advantage has been in the spotlight since the 2010 Affordable Care Act (ACA) was partially financed through over $200 billion in cuts to the program, which at the time had spending rates that were 13 percent higher than the traditional Medicare programs on a per-beneficiary basis. That gap remained in 2013, though it had been reduced to just 4 percent.

Medicare Decision Under Scrutiny from Congress

As with anything regarding the health care industry, the decision was the center of fierce political debate. Forty senators signed onto a letter to Medicare administrator Marilyn Tavenner calling for payments to be frozen, and health insurers have lobbied heavily against any reductions in compensation for plans that are often among the most profitable for the industry.

“The health law cut more than $300 billion from the popular Medicare Advantage program, potentially forcing hundreds of thousands of beneficiaries to find new health care plans, despite the president’s promise,” said Rep. Joe Pitts, Pennsylvania Republican and chairman of a House panel on health. “The cuts announced today will only exacerbate the effect this will have on the health care of millions of our nation’s seniors, leaving them with higher costs and fewer choices.”

However, Medicare officials insisted that the cuts to the program would not hurt its viability.

“We believe that plans will continue their strong participation in the Medicare Advantage program in 2015 and beneficiaries will continue to have a wide array of high quality, high value, low cost options available to them while at the same time we are making certain that plans are providing value to Medicare and taxpayers,” said CMS’s principal deputy administrator Jonathan Blum.

Major Health Insurers Share Similar Chart Pattern with Rising Resistance Level

Humana’s big gains on the day may have been buoyed by bullish technical factors. Since crossing $90 a share in early August, the price has acted as a support level, with the stock bouncing off that level in late October and again early this month. Since February 5, when shares opened sharply lower before recovering, the stock’s gained over 13 percent. It’s also notable that during this same period, the 200-day simple moving average crossed support.

Meanwhile, Humana’s pushing against a rising resistance level established in mid-September. Whether the stock can hold or build on the day’s gains will be interesting to watch. The rising resistance level appears to be an industry trend, as the stock charts for Cigna, Aetna, Unitedhealth Group, and WellPoint all show a similar pattern. The rising support line for Cigna, Aetna, and Unitedhealth started in mid-September, corresponding with Humana, while WellPoint’s can be traced back to late August. The relation to the opening of the ACA exchanges in October could be a driving factor for this industry trend given its timing and the fact that it is consistent across the segment's five biggest players.

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