Starting next year, the federal government will start subsidizing insurers who offer such extra drug coverage to as many as half the 42 million Medicare beneficiaries who are eligible. Some analysts expect insurers, who will offer a range of plans, to reap $10 billion from the program in 2006 and quadruple that in coming years. That potential helps explain why UnitedHealth Group Inc. (UNH
) said on July 6 that it will buy PacifiCare Health Systems (PHS
), one of the largest providers of supplemental Medicare insurance. The companies' stocks have spiked 17% and 33% this year, respectively. "We look at this as an incredible opportunity," says UnitedHealth CEO Dr. William W. McGuire.
It well could be -- but perhaps not as soon as UnitedHealth and its investors would like. Ever since Congress passed the prescription-drug benefit in 2003, critics have said the program is so complicated that many seniors won't sign up -- at least not until they understand it better. Since then, in poll after poll, seniors have been skeptical. One doubter is John Gallapaga, a 74-year-old retired pharmaceutical executive who counsels Medicare beneficiaries part-time. He says: "I don't think what's coming will be that good." When informed folks like Gallapaga remain dubious, you can bet insurers will have their work cut out signing seniors up. "The traction on this might be a lot slower than expected," says CIBC World Markets analyst Carl McDonald.
So are investors getting ahead of themselves? They certainly seem giddy, and not just about UnitedHealth and PacifiCare. The Standard & Poor's 500 Managed Health Care Index has surged 22% this year, far outpacing the broader S&P 500 Home Health Care Index, up just 3% owing to the troubled drug industry.
Investors are flocking to managed health care not only because they believe the drug benefit will be a boon but also because of strong profit margins: Many of the priciest brand-name drugs have gone generic, and hospital admissions are surprisingly low, helping insurers hold down costs.AD BLITZES AHEAD
The prognosis for continued strength, however, is dicey. Insurers' costs could soar as dozens of pricey new biotech drugs hit the market and as an aging population needs more medical care. And until this fall, when the Centers for Medicare & Medicaid Services doles out approvals to insurers who have bid to provide the Medicare drug plans, no one can predict who will win big. Then there's the chance that a new Administration elected in '08 could change Medicare reimbursement rates altogether, making the long-term potential hard to call. Add in seniors' reticence, and McDonald figures the drug benefit will add no more than 1.5% to industry earnings in 2006.
Insurers are working hard to overcome seniors' resistance. PacifiCare alone is investing $50 million this year to develop and market its Medicare prescription plans. Although the major players are keeping their programs close to the vest, industry watchers believe many will launch fall ad blitzes to educate seniors about the plethora of new plans. Insurers also hope to capitalize on the trusting relationships that seniors form with their neighborhood pharmacies: In recent weeks, UnitedHealth has announced an alliance with Walgreen Co. (WAG
), while Aetna Inc. (AET
) has teamed up with CVS Corp. (CVS
) and Rite Aid Corp. (RAD
) UnitedHealth is even partnering with members of Congress to hold community meetings for seniors, all designed to demystify the new drug benefit.
Cutting through the confusion won't be easy. "There's a lot of information out there -- a tremendous amount," says Robert Denz, a retired FBI agent in South Sutton, N.H., and a volunteer for AARP. Still, he adds, "I have questions." Without the right answers, UnitedHealth and its rivals may find it tough to maintain their rosy glow on Wall Street. By Arlene Weintraub in New York