Tuesday, April 24, 2007

The Medicare Fee-For-Service Product is a Kamikaze Flight for Health Insurers--But Are the LBO Guys Interested in Humana Anyway?

There is plenty of speculation over just what the Congress will do about Medicare Advantage payments to health plans.

I have posted on this many times before.

To summarize, I believe:
  • Medicare Advantage payments to health plans will not be cut by the Congress for 2008.
  • But health plans will suffer some relative Medicare Advantage payment decreases in 2008 because the average 3.5% increase the plans are scheduled to get is less than the approximately 5% senior costs are rising.
  • The Medicare Advantage plans will likely be able to compensate for these minor adjustments by making benefit reductions.
  • The first year the Congress can dramatically impact Medicare Advantage rates is 2009, since CMS will have set the 2008 rates with the health plans prior to the Congress finalizing the next budget late this year.
But make no mistake, the Congress will make measurable changes to Medicare Advantage payments for 2009.

Key House Democrats really want to hit the Medicare Advantage plans hard to pay for S-CHIP reauthorization and to reverse much of the 2008 10% Medicare physician fee cuts that are set to take place without Congressional action.

Senate Democrats are inclined to make 2009 payment adjustments but are not interested in scuttling the Medicare Advantage plans. Democratic Senators like Max Baucus and Ron Wyden stand out in that category.

When the day is done, House Democrats will want big cuts and Senate Democrats will be more moderate in their approach. The result will be compromise cuts for 2009 that will be measurable and will cut into both benefits and profits.

But I will tell you where even the moderate Democrats are not going to be defending private Medicare--the private fee-for-service plans.

Everyone, in Washington and the health insurance industry (in their off-the-record moments), see Medicare Advantage private fee-for-service plans as nothing more than an arbitrage play. Initially created as a transition plan, there isn't any evidence any of the plans are using these programs to do anything other than grow profits.

No one on the Democrat side is going to defend fee-for-service Medicare Advantage plans (and maybe not a lot of Republicans either).

Yet, health plans continue to announce plans to expand their Medicare private fee-for-service products, in may cases in markets where they don't have the "upstream" network Medicare Advantage plans.

With the Congress poised to go after private fee-for-service Medicare plans, such a strategy is nothing but a Kamikaze flight!

We are hearing that there is speculation on Wall Street that the biggest Medicare fee-for-service player, Humana, may be of interest to the leveraged buy-out guys. The reasoning goes that Humana's profits are really out on a limb because of their focus on Medicare Advantage, and especially their emphasis on their fee-for-service product, with the Democrats wanting to cut both. Therefore, getting taken out sooner rather than later makes sense for them. The speculation goes on that with such a high stock multiple, and the political risk, no competitor would be dumb enough to pay a premium on the existing stock price to take them out. That leaves the LBO players who have more cash and access to debt than they know what do do with.

An interesting, if only highly speculative, scenario.

Do you know of any LBO guys who have their pilot's license?
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