By Dinah Wisenberg Brin
Of DOW JONES NEWSWIRES
Managed-care companies should learn Monday whether the disappointing proposal for 2010 Medicare Advantage rates will become final or whether the government will temper the numbers as it often has in the past.
The stocks sold off in February after the Centers for Medicare and Medicaid Services proposed a much lower-than-expected rate for next year. The proposal called for an average increase of 0.5%, which analysts say amounts to a 5% rate cut after adjustments. CMS aims to issue the final rates after the close Monday.
Managed-care stocks traded lower Friday. Humana Inc. (HUM), which has the highest Medicare Advantage exposure among the large national health insurers, was down $1.62, or 6%, recently to $25.38.
If the proposed rates stay in place, insurers likely would have to cut benefits to seniors in the private Medicare Advantage health plans, exit markets or take other steps to protect their profit margins. President Barack Obama has targeted Medicare Advantage plans for funding cuts, although the proposed rates for 2010 caught insurers and investors off guard as they signaled the administration's resolve to move quickly.
Analyst opinions on the final rates are mixed.
"While much speculation exists about the final rates, we believe they will ultimately prove more favorable to the industry," Stifel Nicolaus analyst Thomas Carroll wrote Friday. "This may create a short-term trading opportunity opposite the one presented ahead of the preliminary rates," with Medicare-focused companies such as Humana, Health Spring Inc. (HS) and Universal American Corp. (UAM) possibly drawing greater investor interest, he added.
In five of the past six years the final rates were more favorable to the industry than the preliminary rates, Carroll noted. He sees some key compromise points that could lead to more favorable industry reimbursement than first suggested.
If the proposed rates stand, Carroll said, stocks in the sector likely will return some of their recent gains.
UBS, meanwhile, expects the final rates to be largely unchanged from the February proposal, despite industry pressure. The firm projects plan reimbursement rates to be down 1% to 3% in 2010, after adjustments. The recent selloff in stocks with high Medicare Advantage exposure has priced in the uncertainty associated with a tougher regulatory environment over the next several years, UBS said this week.
Deutsche Bank this week called the big-picture outlook bleak for Medicare Advantage, and said efforts by Obama and the Democratic-controlled Congress to enact health reform "will likely place substantial additional pressure on MA rates beyond 2010," hitting both growth and margins "Medicare likely sits at the vanguard of the submarkets where President Obama will look to constrain the private sector's role in health system management."
Early this week, Medicare issued a letter containing policy changes and guidance for Medicare Advantage plans as the plans prepare bids for 2010. Deutsche Bank's Scott Fidel said the letter includes restrictions that "reinforce our view that (Medicare Advantage) is going to be an extremely tough business" for the managed-care companies under the Obama administration.
Among other changes, the letter included new restrictions on setting out-of-pocket maximums above $3,400 for members, and said Medicare will shift from routine audits to more targeted, data-driven and risk-based ones. Stifel expects the audit change could add volatility to managed-care stocks.
-By Dinah Wisenberg Brin, Dow Jones Newswires; 215-656-8285; dinah.brin@dowjones.com
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