Medicare Advantage Cuts Don’t Bite: Health Insurers’ Stocks Rally

February 28, 2014
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cuts-medicareLate Friday, after the stock market closed, the Centers for Medicare & Medicaid Services (CMS) announced proposed n

cuts-medicareLate Friday, after the stock market closed, the Centers for Medicare & Medicaid Services (CMS) announced proposed new rates for Medicare Advantage plans. These are Medicare plans that are run by private insurers that give seniors more choices than they have under traditional Medicare Part A (hospital) and Part B (physician) benefits.

ObamaCare is largely funded by cuts to Medicare, especially Medicare Advantage. However, the Administration has not squeezed rates as much as anticipated. Last year, announcing 2014 rates, CMS surprised by increasing rates by 3.3 percent, leading to a rally in insurers’ share prices. At the time, AHIP, the insurers’ trade association, announced that:

CMS has taken an important step to help stabilize Medicare Advantage at a time when the program is facing significant challenges. We are currently reviewing the final rate announcement and will continue to work with policymakers in both parties to strengthen this critically important part of Medicare that provides high-quality, affordable coverage to more than 14 million seniors and people with disabilities.

AHIP later determined that the 2014 rate change was a cut of 6 percent, and responded to last Friday’s announcement with concern that the proposed cuts will be “devastating“. How big will the 2015 cuts be? The headline figure is 1.9 percent, but Wall Street analysts quoted by AHIP’s spokesman gave ranges of cuts from 4 percent to 9.3 percent.

After digesting the news, investors pushed the stocks up on Monday. With the S&P up 0.62 percent on Monday, health insurers significantly outperformed:

  • Humana, Inc. (HUM) ― up 10.57%
  • HealthNet, Inc. (HNT) ― up 4.75%
  • UnitedHealth Group, Inc. (UNH) ― up 2.98%
  • WellPoint, Inc. (WLP) ― up 2.69%
  • CIGNA, Inc. (CI) ― up 2.39%
  • Aetna, Inc. (AET) ― up 1.95%