Humana Inc. (HUM:US) led medical insurers higher in trading today after the U.S. government reversed a decision to cut a key Medicare payment rate, offering them an increase instead.
Humana rose 5.5 percent to close at $79.11 in New York, and UnitedHealth Group Inc. (UNH:US) gained 4.7 percent to $61.74, after the Centers for Medicare and Medicaid Services went public yesterday with the decision to do away with a planned rate reduction. Instead, insurers will receive a 3.3 percent increase in the rate that determines the payments they get for running the government’s Medicare Advantage plans.
Insurers had threatened to reduce benefits in Medicare Advantage plans if the cut was maintained. While the initial reduction for insurers was calculated on the basis that doctors’ pay would also be trimmed, Health and Human Services Secretary Kathleen Sebelius is now directing Medicare’s actuaries to assume Congress will keep physician fees the same.
“It’s clearly the administration’s position that changed here,” said Sheryl Skolnick, an analyst at CRT Capital Group in Stamford, Connecticut, in an interview. “That’s a clear victory” for health insurers.
Humana said it was evaluating the anticipated effects the decision and other regulatory changes will have on its Medicare Advantage offerings for next year.
“We are pleased that CMS has recognized the significant negative impact the rates initially proposed for 2014 were expected to have,” the company said in a statement today.
Investors appeared to have anticipated the rate change. About 40 minutes before the reversal’s announcement yesterday afternoon, insurer shares surged. Humana jumped 8.6 percent in trading at about 3:40 p.m. UnitedHealth, the largest U.S. health insurer, jumped 3.1 percent.
“Whenever there’s a major announcement there are of course some people who anticipate this correctly,” said Utpal Bhattacharya, an associate professor of finance at Indiana University in Bloomington. Humana’s trading yesterday “is suspicious,” he said, because the stock rose almost as much before the announcement as after.
It isn’t clear whether traders learned of the information before it was announced or if they speculated the industry’s lobbying would be successful. A spokeswoman for the Securities and Exchange Commission, Florence Harmon, declined to comment.
The about-face by the Medicare agency came after insurers and lawmakers complained that the Obama administration relied on faulty accounting assumptions when it proposed in February to cut the Medicare Advantage rate by 2.2 percent staring next year. Medicare Advantage plans are used by about 13.1 million elderly and disabled Americans.
Humana gets 66 percent of its revenue and 58 percent of profit from Medicare Advantage, leading the industry, according to estimates by Cowen & Co. analysts. Minnetonka, Minnesota- based UnitedHealth and Health Net Inc. (HNT:US), based in Woodland Hills, California, each get 25 percent of revenue from Advantage plans.
Health Net gained 2.6 percent in trading yesterday. WellCare Health Plans Inc. (WCG:US), based in Tampa, Florida, rose 5.8 percent. Health Net was unchanged at $29.12 today, while WellCare rose 3.9 percent to $62.57.
As of the end of last year, more than one in five U.S. insider-trading cases involved health-care stocks, according to data compiled by Bloomberg. Pharmaceutical and biotechnology companies are particularly vulnerable to insider trading because of the large number of people with insider knowledge of market- moving events. This can include changes in regulations, government approvals of drugs, the results of clinical trials, and acquisition or partnership deals.
“A lot of people are in the know,” Bhattacharya said in a phone interview. “You don’t have to do anything, just get the information first.”
The most notable case of late involving health-care stocks came when the U.S. in November indicted Mathew Martoma, a former hedge-fund manager at Steven A. Cohen’s SAC Capital Advisors LP. Prosecutors accused Martoma of helping the firm make $276 million on illegal tips about an Alzheimer’s drug by trading in shares of Elan Corp. and Wyeth LLC. He has pleaded not guilty to the charges and is awaiting trial.
The Centers for Medicare and Medicaid Services, or CMS, didn’t respond to a request for comment on the trading activity in health insurance stocks yesterday.
Today, Health Net increased 4.3 percent to $30.36 while WellCare climbed 5.6 percent to $63.59.
Medicare Advantage plans are used by people who opt for the program over traditional Medicare because of added benefits such as lower out-of-pocket spending and discounts for gym memberships and eyeglasses. The government estimates that it spent about $136 billion on the plans in 2012.
Combined with other changes to insurers’ Advantage rates, including cuts previously ordered by the 2010 Affordable Care Act, Skolnick said insurers should see about a 2.5 percent reduction in their total payments from the government, 5.5 percentage points better than the initial proposed cut.
“That seems like a manageable set of rates and much more aligned with expectations,” Skolnick said.
Medicare’s initial calculation for the Advantage rate assumed Congress would let stand a 25 percent decrease in doctors’ pay, which is a component of reimbursement to the insurance companies. That trimming of rates to physicians is required by a provision in a 15-year-old balanced budget deal that has been overridden by Congress every year since 2002 in a maneuver nicknamed “The Doc Fix.”
More than 160 lawmakers wrote the Obama administration asking for the Advantage cut to be reconsidered, according to America’s Health Insurance Plans, the industry’s Washington- based lobby group.
“CMS has taken an important step to help stabilize Medicare Advantage at a time when the program is facing significant challenges,” Karen Ignagni, the president and chief executive officer of AHIP, said in a statement.
The Medicare agency said at the beginning of March that it only assumes current law in all proposed rates. The Congressional Research Service said in a report about three weeks later that Medicare had the authority to set Advantage rates based on the assumption that Congress would pass a “Doc Fix.”
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