Wednesday, February 28, 2007

If Medicare Advantage Rates Are Going to Be Cut, Why Have the Big Medicare HMO Stock Prices Been Up Since the Election?

That question came from Matt Holt today over at his blog: The Health Care Blog.

Good question.

As any regular reader of this blog knows, I have been arguing that the Democratic Congress is going to cut Medicare Advantage payments to HMOs as soon as they get their hands on the federal budget.

If that is a good bet, why wouldn't Medicare HMO stocks be reflecting that risk? Instead, they have generally been up nicely in value since the election.

It is also notable that Wall Street analysts have estimated that Medicare Advantage HMOs will receive a 3% to 4% payment increase in 2008--based upon the payment policies instituted by the Republican Congress.

In fact, a number of key managed care analysts just reaffirmed their confidence in the Medicare HMOs. Matt Perry of Wachovia recently wrote, "We view 3% as a reasonable increase that will sustain membership growth and margins for most plans in 2008." Carl McDonald of CIBC wrote that some Medicare Advantage plans might have to reduce benefits a bit because health care inflation will likely be more than 3% to 4%, "which means products will not be as attractive as they are this year." Matt Borsch of Goldman wrote, "It appears likely that the 2008 MA rate increases will lag medical-cost trend, implying a modest level of benefit reductions and/or member-paid premium increases will be needed to maintain profit margins." However, "We continue to believe that the [Medicare Advantage] program will provide strong growth for managed care companies in 2007 and 2008." (Source: Kaisernetwork.org 2/22)

So, Wall Street would appear very confident that Medicare HMO payments will continue at minimal, but adequate, levels in 2007 and 2008. Based on the fantastic Medicare Advantage profits reported by the Medicare HMO players in 2006, they apparently feel confident the Medicare Advantage growth and margins will remain strong through 2008.

However, all of this is based on CMS continuing to pay the HMOs from the Republican payment base.

Apparently, these analysts don't think the Democrats will be able to cut Medicare Advantage payments presumably because they think the number of seniors enjoying these plans constitute a powerful political force and because George Bush will still wield a powerful Presidential veto until January 2009.

I will counter that they don't know Pete Stark, John Dingell, Charlie Rangel, and Ted Kennedy very well. They also don't understand the power committee chairmen have in the Congress--particularly late in the budget process. They also don't seem to understand how badly the Democratic Congress needs the Medicare Advantage "over payments."

The CBO report yesterday, estimating these "over payments" to be worth $65 billion over five years, just put the icing on the Democratic cake.

Wall Street needs to do a better job of factoring in the political risk to Medicare Advantage plans:
  • A Bush veto will do the MA plans no good --an earlier post.
  • Why the Democrats Hate Medicare Advantage Plans--an earlier post.
  • Why the Democrats need the MA money--an earlier post.
The Democratic Congress certainly won't be able to impact 2007 Medicare Advantage payments making the next few quarters almost certain to look good for the Medicare HMOs. It may also be that the Congress won't be able to impact 2008 payments since that process will pretty much be put to bed by this summer. But maybe not--the Congress makes the rules and the Congress can change the rules. And, then there will be 2009--maybe the first real Democratic budget year for the HMOs.

Whey are the HMO stocks doing so well in the face of these Medicare Advantage political risks?

Short-term versus long-term.

Since when did Wall Street care about the long-term?
Avoid having to check back. Subscribe to Health Care Policy and Marketplace Review and receive an email each time we post.

Blog Archive