Friday, February 27, 2009

Medicare Advantage HMO Stocks Down Big This Week

Matthew Holt, publisher of the Health Care Blog, and I have been in a state of incredulity over Wall Street’s head in the sand view of the Medicare Advantage business for more than a year. See his post today, "I Don't Really Understand Wall Street, Part 98."

Why was it that in the wake of a Democratic take-over of Congress in 2006 and Obama’s victory last November that HMO stocks heavily invested in the Medicare Advantage business had not paid a bigger price for betting the Republicans would still be in power in 2009?

This week, HMOs disproportionately invested in Medicare Advantage, like Humana and Universal American, were down 30% on top of their already huge plunges from their 52-week highs. Two things drove the loss of confidence this week. First, CMS said that the Obama administration would begin the cutting in 2010 by announcing a much lower 0.5% increase in the National Per Capita Medicare Advantage Growth Percentage. The market was expecting the Obama administration to be as generous as the Bush folks and announce a 3% to 5% increase.

Then the first Obama budget was announced and, guess what, the administration put $177 billion in Medicare Advantage cuts into it. Not like the new President hadn’t told us he would do this, maybe two or three hundred times, during the campaign.

In January 2008, in a post, Medicare Advantage Cuts? I said, “From the looks of Medicare Advantage-heavy HMOs' share prices, there's apparently lots of sand on Wall Street and a great many people have their heads buried in it.”

On the very first day this blog went online in a December 2006 post called, The Democrats Will Change MedicareAdvantage I said, “What many of these financial analysts on Wall Street don’t understand (Humana is trading at the highest price/earnings multiple in the HMO industry) is that, to the Democrats, this is not just about a fair funding level for private Medicare plans and whether they want to risk messing with them. It is about deep-seated ideological objections.”

I also said in that 2006 post, “In fact, Goldman Sachs analyst Mat Borsch came out with a positive report on Humana, a company that has been particularly aggressive in the Medicare market. Borsch said that while it is possible Democrats would change the Part D program, 'the odds of substantial change to the Medicare Advantage plan program (which is what really matters to Humana) are remote.”

But here is what Barron’s is reporting the analysts are saying this week,
In a note today [February 23, 2009] downgrading both HealthSpring and Humana, along with $575 million Universal American Corp. (UAM) to “Underperform” from “Market Perform,” BMO Capital analyst Dave Shove writes today that Medicare’s profitability growth “will all but disappear” as a result.

Medicare programs will see “significant” reductions in enrollment in 2010 and a 1.5 percentage-point drop in profit margins, writes Shove, and the movement of many of the insured to public programs away from private Medicare coverage. The last time HHS “dealt a crushing blow to Medicare Advantage capitation rates,” in 2000, writes Shove, “the program lost roughly 10% of enrollees in the first year, and bottomed out with 22% participation loss over a three year span.” (Bear in mind, the capitation rates statement is preliminary: final rates will be decided on April 6 and could potentially be higher, meaning, more profitable.)

All three companies have the greatest exposure to Medicare among managed care as a percentage of earnings. “We believe that budgetary strain and sentiment shift on Capitol Hill will cause 2010 [Medicare Advantage] plan changes to drain the profitability from the program,” writes Shove.
Wall Street now seems to think the Obama health plan budget is a threat to the Medicare Advantage business.

It is not.

But since Wall Street hasn't listened to me for two years, I am not going to tell them why!

Here's a hint: Medicare Advantage Payments to Insurers--Baucus Zeroing In!
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