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POLICY/POLITICS: Will Medicare Advantage get slashed? with UPDATE

Bob CBO Pours Gasoline on the Democratic Plans to Cut Medicare Advantage Payments to HMOs.

It just blows my mind that UNH is up 20% since the election. But the evidence is right here that Wall Street doesn’t believe Bob, or just doesn’t care. Maybe someone smarter (and richer) than me can explain why. I’m just glad I was too chicken to short UNH after the election.

Unh

 UPDATE: Bob has answered my question. He thinks that Wall Street is short-termist and doesn’t believe that there’ll be cuts in 2007.

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John LandonStella BaskombBarry CarolJack Lohman Recent comment authors
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Stella Baskomb
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Stella Baskomb

Barry, “The biggest risk for all the managed care stocks, I think, is a reversal in the deceleration of the medical cost trend” I think you’re right about this. The estimate for 2007 is basically for trend to remain flat or a little less vs. 2006 with an uptick for 2008. If trend materializes according to this estimate, underwriters should have no trouble keeping premiums ahead of trend and plan sponsors will continue to reduce benefits to minimize the impact – including more high-deductible plans. So employees and their families (i.e., voters) will experience a rate of increase to the… Read more »

John Landon
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John Landon

It’s definitely an easy offset target for the Democrats. But some of the outside trade groups do have some powerful Democrat lobbyist who might be able to fight off a huge offset. This Web site seems to be following the offsets closely:
healthblogger2007.blogspot.com

Barry Carol
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Barry Carol

Jack,
I think it’s an excellent buy. I own it personally, and we own it in our pension fund.

Jack Lohman
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Does that mean UNH is a good buy at this point. They are certainly one of the largest Advantage providers.

Barry Carol
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Barry Carol

Jack,
The tug of war that Medicare would face if they insured everyone is their desire to adequately compensate all providers (cover their costs plus a fair profit) vs the practical limitation on how much tax revenue the political process can coerce out of citizens’ pockets. Considering Medicare’s poor record of controlling utilization of services, revenue is likely to prove to be a constraining resource. Like other national systems, it will have to resort to either implicit and/or explicit rationing in order to reduce demand sufficiently to fit within the financial resources available to pay for services.

Barry Carol
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Barry Carol

Stella. That was an excellent recap of the UNH stock situation. I would add that the consensus earnings estimate for 2007 is $3.40. With the stock at $52, the P/E multiple is only 15.3, very low for a company of this quality and growth potential vs other investment alternatives. Moreover, cash flow is exceptional while the stock buyback program is temporarily suspended until the SEC signs off on UNH’s corrective actions in the aftermath of the stock option scandal. Once the SEC signs off, UNH can file its financial reports. After that, the buyback program will resume, but the timing… Read more »

Jack Lohman
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Having been in the business world, Barry, I can make my profit look like anything I want. It just requires taking higher salaries and perks. Controlling utilization, of course, adds an additional cost that often translates to denial of care, which I don’t always disagree with. But the higher salaries to well-paid CEOs is, in effect, patient money that is not being spent on patient care. And MAs also have a marketing cost regular Medicare does not have, and that again is patient money not spent on patient care. I’ll stick with regular Medicare, thank you, at least as long… Read more »

Stella Baskomb
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Stella Baskomb

“It just blows my mind that UNH is up 20% since the election.” Since the election is one way to slice it. Since September 1, 2006 is another. Since January 1, 2006 is another. And any way you choose to slice it, one must take into account the company’s own earnings guidance, and Wall Street’s assessment of that guidance. Put in perspective, the runup since November doesn’t seem to me all that mind blowing. 1. In February – that would be after the election – UNH announced its earnings and forward guidance, and both were positive. CreditSuisse initiated its analyst… Read more »

Barry Carol
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Barry Carol

Jack, I think it is important to point out three key facts about MA plans. First, according to Humana CEO, Mike McCallister, the long term sustainable profit margin on MA business is about 5% of revenue before taxes. Second, most MA plans provide some extra benefits such as disease management which standard Medicare doesn’t offer but can help to control utilization. Finally, according to the Congressional Budget Office (CBO), private plans pay, on average, 20% higher rates to providers than standard Medicare ranging from up to 30% higher in rural areas to little or no premium in the largest metropolitan… Read more »

Jack Lohman
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Its additional cost of 12.5% over regular Medicare is unnecessary, but if that’s what it takes to satisfy the politicians and the special interests that are paying them off, I’d be okay with making it our (optional to Medicare) single-payer model for all citizens of the US. The 12.5% is a small price to pay compared to the 50% it now is with private industry running it. But remember; it is essentially managed care.