What Medicare Reimbursement Increases Really Mean (AET, CI, HUM, UNH, WLP, UAM)

After promising voters that the Affordable Healthcare Act (aka Obamacare), and other health care initiatives designed by the current administration would not result in any increase in costs for citizens, just the opposite is starting to emerge. The American Action Forum in Washington issued a report last week that points out that Obamacare has so far cost $30.8 billion and 111.4 million hours to complete paperwork to individuals, health care institutions and small businesses.

Regarding an increase in premiums, the organization surveyed health care costs in five major U.S. cities: Atlanta, Austin, Chicago, Phoenix and Milwaukee. The results, to say the least, are sobering. Young and healthier individuals, including small employers, can expect a 169 percent premium increase, averaged across the five cities, the report concluded. Consumers in Milwaukee could experience the greatest sticker shock, with an estimated 190 percent increase in 2014.

Yesterday, in a stunning and unexpected move, the Centers for Medicare and Medicaid Services (CMS) announced a 2.96% increase in the Medicare Advantage (MA) per capita growth rates for 2014. The headline news was that Secretary of Housing and Human Services (HHS) Kathleen Sebelius reversed the long-standing policy to include the sustainable growth rate (SGR) formula in the following year’s per capita growth rate calculation. Now the department will assume that Congress will pass the SGR fix at some point prior to January 1, 2014, thus averting the scheduled 25% cut to physician payments. The bottom line is that too many physicians were ready to leave the Medicare business, and somebody has to pay to keep them in the game.

A full press lobbying effort was used to overturn what the industry and some other observers saw as draconian government cuts that were expected to be in the 2.2% range. Also included in the decision was a CMS ruling that will allow total member cost sharing of $34 per member, per month (PMPM), up from the current $30. Not a gigantic increase, but one consumers will pay. The ultimate winners are the stocks in the managed care industry.

Year to date, health care and equipment services is one of the top performing market sectors, up more than 12% through the first quarter. The question for investors is which stocks will benefit the most? The answer, according to the market’s response, is the top diversified managed care organizations and other assorted industry niche players. Top names rallied sharply yesterday on the news.

Aetna Inc. (NYSE: AET) was up 3.67% yesterday, closing at $54.33. Cigna Corp. (NYSE: CI) rose 2.92% to close at $64.75. Humana Inc (NYSE: HUM), which is a large Medicare provider, was up a whopping 5.47% to close at $79.12. UnitedHealth Group Inc. (NYSE: UNH), one of the nation’s largest providers of business health plans, rose 2.77% to close at $61.74 . WellPoint Inc. (NYSE: WLP) was up 1.50% and closed at $68.46. Speciality health and life insurance company, Universal American Corp. (NYSE: UAM), which focuses almost exclusively on Medicare services, was the day’s big winner. Universal American ended the day 8.29% higher, to close at $9.40. Profit takers cut many of the stocks gains in half by the end of the day.

There was one very interesting component that we thought our readers would find interesting. In an almost unprecedented move, HHS Secretary Sebelius overruled the “professional judgement” of the CMS actuary in obtaining the rate increases that rallied the stocks.

In another move that the administration must have shuddered at, Secretary Sebelius suggested just last week that Obamacare would cause higher premiums for some in the individual insurance market. While Sebelius tried to smooth out the prediction saying that the hikes involved would be “slight,” insurance industry representatives and research data have suggested otherwise.

Stock market investing always has rewarded the savvy stock picker who anticipated an event that sends the price of their chosen stocks higher. In the case of the managed care stocks, the CMS rate increase did that trick. Affordable health care is not looking like what was sold at the ballot box. The spiraling costs of health care coming down the road are in a book the size of a New York city phone book, and it really looks like those politicians that signed it neglected to even read it.