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Shares of Humana Inc. slipped Friday after an analyst lowered his rating on the company, as health insurers wait for the final word on possible steep Medicare Advantage rate cuts next year.
THE SPARK: Shares of several insurers also slipped last month after the Centers for Medicare and Medicaid Services said it expects costs per person for Medicare Advantage plans to fall more than 2 percent in 2014. The government uses this figure as a benchmark to determine payments for the plans, which are administered by insurers.
Analysts and some insurers had expected that benchmark rate to be flat or nearly so. They said the decrease may translate into a rate drop of 7 percent or more in 2014, considering that the plans also will face other pressures. That includes a premium tax that will help fund the health care overhaul, which will expand next year to help millions of people get insurance coverage.
Many expect government to soften any potential rate cuts before final figures are announced on April 1.
THE BIG PICTURE: Medicare Advantage plans are privately run versions of the federally funded Medicare program for the elderly and disabled people, and the coverage represents a fast-growing market segment for insurers. These plans come with extra benefits like dental or vision coverage or premiums lower than standard Medicare rates.
Insurers offer hundreds of Medicare Advantage plans around the country, all with their own sets of variables like different deductibles, premiums and co-insurance. More than 13 million people were enrolled in Medicare Advantage plans last year, or about 27 percent of the Medicare population, according to the Kaiser Family Foundation.
Humana and UnitedHealth Group Inc. are the two largest Medicare Advantage providers.
THE ANALYSIS: Susquehanna analyst Chris Rigg lowered his rating on the shares to "Neutral" from "Positive."
He said in a Friday research note he remains bullish on the stock and Medicare Advantage plans in the long term, but Humana shares could fall or rise significantly depending on the final rates, which he expects to be slightly better than what was proposed in February.
"We are moving to the sidelines and we are reducing our price target to $74 (from $85) given this potential volatility," he said.
Rigg also noted that Humana's Medicare Advantage membership is skewed toward preferred provider organization plans, which can yield thinner profit margins than health maintenance organizations. They could wind up more at risk to cuts from CMS. That means Humana may have to dramatically raise premiums, cut benefits or leave markets that are no longer profitable if the cuts wind up being severe.
SHARE ACTION: Down 2.2 percent, or $1.48, to $66.88 Friday afternoon, while broader trading indexes climbed slightly. Humana shares have fallen about 14 percent since the CMS announcement last month.