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HEALTH PLANS: Matthew Holt, stock trading pussy

Sector Wrap: Health Insurers Fall. UNH is down $5 or close to 10% from its high on Tuesday with Allen’s conecession in VA giving the Dems the Senate being probably the clincher today.

Insurers

And was I short, like I said I would be on Monday? Back then the 45 Nov puts were trading at 20 cents, today they’re 55. So how many did I load up with? (no need to add the next sentence!)

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  1. John,
    I’m not sure exactly when the Medicare Advantage payment formula was changed from the original 95% of average Medicare FFS payment rates to the current system. I was surprised to learn that CMS has developed a risk scoring system based primarily on historical use of the Medicare program. An average risk score is 1.0. If Humana, or other providers, wind up with a pool that scores less than 1.0, they will be paid proportionately less than the 11% premium over the average FFS spending rate. If it scores higher, they will be paid more.
    Conceptually, as a taxpayer, I find it hard to understand why CMS is prepared to pay Medicare Advantage providers a premium payment (even for superior benefits) when it is having trouble controlling overall program costs. On the other hand, it appears probable, that the large private insurers with the most robust information systems, could provide the standard benefits package for less because, if nothing else, the insurers will probably do a better job minimizing fraudulent payments. This assumes that their payment rates to providers are the same as the standard Medicare FFS rates. When CMS contracts with the Blues and others to provide claims processing services, it looks, at least to this taxpayer, that it is behaving as little more than a big dumb payer.

  2. Barry, thanks for the info. I’m pretty sure that when Medicare Advantage originated in the 1990’s that the reimbursement for HMO’s was set at 95% of the average per capita cost for Medicare FFS. I was not aware that this basic formula had changed – do you know about when the change took place?
    You and I certainly agree that if current reimbursement were “slashed” the present program could not be sustained – because the HMO’s (and now PPO’s too) would be likely to withdraw. However, I don’t think it’s clear whether ending Medicare Advantage would benefit either the present participants or the taxpayers in general. For example, that would appear to reduce benefits for the Medicare advantage participants. (11% higher reimbursements less their 5% profit margin implies 6% of something else, presumably higher benefits – dental, vision, hearing, deductible/coinsurance fills, etc).
    “why should it be if it’s just costing the taxpayer more?”
    Matt, good question. I think your question and Barry’s comments lead to two more questions: (1) Does Medicare Advantage just cost more to provide benefits that are identical to Medicare FFS? (2) To what extent do Medicare Advantage plans cost more because they provide more than just the Medicare FFS benefits?
    It’s my understanding that the choice to participate in a Medicare Advantage plan is voluntary yet many people have chosen to do so. Participants always retain the right to return to Medicare FFS if they wish. So it does not seem likely to me that Medicare Advantage costs more without any additional benefit. As importantly, once enrolled, why do people stay?

  3. John,
    Actually, insurers are paid about 11% more than standard Medicare on average for each Medicare Advantage member. They receive significantly more than that for sicker members. The insurers also claim that they provide additional benefits beyond paying claims including disease management, catastrophic case management, health prevention programs, etc. Humana estimates the long term sustainable profit margin on this business based on current payment rates at about 5% pretax. It appears that if the current payment premium vs standard FFS Medicare were eliminated or even sharply reduced, the MA program could not be sustained.

  4. Oops I didn’t notice the timing of your original post. My bad.
    “Threrefore if the plans want to quit, then their members can return to mainstream FFS Medicare, and the government will save money overall”
    But how does Medicare decide what to pay the Medicare Advantage plans? I think Medicare pays a percentage of its FFS cost. The percentage is less than 100%. Even if the HMO’s are profiting, the cost to Medicare should still be less than if their membership had remained in FFS Medicare. So if a large number of people return to FFS, odds are high it will cost Medicare more, not save them anything. For one thing, the Medicare Advantage HMO’s (and, now, PPO’s) generate lower costs through their networks and provider pricing discounts. The value of those discounts would be lost for members who return to FFS.
    “paying the claims for Part A & B usually done by regional Blues and EDS-not the Medicare Advantage piece”
    Maybe not in Medicare Advantage, but Aetna, UNited, CIGNA and some other insurers absolutely do quite a bit of this admiistration for Medicare. It’s a low-margin business but my point is that Medicare needs these administrators and if Medicare “slashes” the present low-margin reimbursement, it will reduce the insurers’ incentive to stay in the game. Some years back, I was in senior management at a large Blue plan, and our CFO argued almost monthly that we should quit the government business because of its low margins. The CEO’s position was (and the BOard agreed) that the Medicare business is also high-volume, and generates millions in essentially underwriting-risk-free income that pays more than its share of fixed expenses – rent and light bills etc. If that income were “slashed” I think the present administrators would reevaluate their participation. That could put Medicare in a real bind. That is why I stated that they need one another.

  5. errr….John. Well you’re right about the bigger news but that hit the market Wednesday (as I reported on Weds…scroll down a few posts), Thursday’s reaction was as much about the Senate as anything because Congress can now pass a budget which can include big changes without needing any Republican votes, and is Bush really going to veto it to save UNH’s behind?
    Secondly, being a contractor to Medicare has been fantastically profitable in the past 2 years. Most Democrats (especially Stark) believe that Medicare is overpaying hte plans. Threrefore if the plans want to quit, then their members can return to mainstream FFS Medicare, and the government will save money overall. So why do they “need” the plans at all.
    So I just dont get your analogy–the administrative services you are talking about whih hte government needs to run FFS Medicare (literally paying the claims for Part A & B usually done by regional Blues and EDS-not the Medicare Advantage piece) are a low margin business that has gone on forever and has no impact on Insurer’s stock prices.

  6. Matt there was more important news for UNH yesterday, than the elections. Their senior managers forfeited almost $400 million in options, and UNH may need to restate its earnings for the past ten years or so. That news is more meaningful to the price of UNH stock than the elections, despite what the news media are blabbering.
    What’s more, the stocks of the other major players in health insurance are reacting to UNH’s bad news. Or more accurately, Wall Street is reacting. Wall Street believes there is no future in the health insurance business. They may be right. So any time any of the big players hits a rock in the water, all the stocks dip.
    The chart you posted shows the past few days. Given the hair-trigger negative response typical of the present health insurance market, one must look at longer periods if looking for trends.
    One of the linked articles states: “Most important, Democrats may try to slash compensation rates the government pays health insurers to administer Medicare insurance plans.”
    Problem is, the government needs the insurance companies, and the insurance companies need the government. Mutually-assured destruction. The big insurance companies won’t play if they can’t get what they need. And the government has no other sources from which to buy administrative services to manage Medicare. My opinion? The undeniably cosmic privilege of being a contractor to Medicare will not likely persuade the major insurance companies to work for less than their expected cost plus their target margin. This is a LOT more complicated than the reporting suggests.
    I blame Nancy Pelosi. (I would blame George Bush, but that would be so 48 hours ago).

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