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.
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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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 sum of their costs and contributions that exceeds trend. This will keep the political heat on the Congress.
A very fluid situation. Wouldn’t take much to change it.
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
Jack,
I think it’s an excellent buy. I own it personally, and we own it in our pension fund.
Does that mean UNH is a good buy at this point. They are certainly one of the largest Advantage providers.
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.
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 is highly uncertain.
I think the Barron’s article was a good summary of the company’s prospects. The biggest risk for all the managed care stocks, I think, is a reversal in the deceleration of the medical cost trend which has been coming in slightly below the assumptions that were built into their pricing.
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 as I have the option.
Remember that with a true single-payer system (ie, Medicare-for-all), cost shifting would not be an issue and Medicare would have to ensure sufficient payment to all. Even still, if a physician today were to only take Medicare they’d do okay. Would they be better off with a private payer that paid ten times what Medicare pays? Of course. But that’s part of our problem.
Your restaurant analogy is true to a point, but if the government saw that restaurants could not survive at the discounted rates they would increase their reimbursements. Likewise, they do not want to drive physicians and hospitals out of business. They want to reimburse them fairly without getting ripped off.
“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 opinion coverage of UNH at “outperform” – on election day November 7th, 2006. And here is Barron’s comment:
“With sales and profits up smartly, shares of UnitedHealth, which closed on Friday at $50.88 on the New York Stock Exchange, could climb to the 70s within two years, Barron’s said in its edition of February 12.”
h**p://biz.yahoo.com/rb/070211/unitedhealth_shares.html?.v=1
2. Keep in mind that UNH stock had already fallen off throughout 2006 as a result of their mismanagement of stock options.
3. On Jan 1 2006, UNH stood at almost $65. As of September 1, 2006 it stood at about $52. As of yesterday, it still stood at about $52.
4. UNH stock did decline about 15% in the 60 days prior to the election.
5. The improvement in the stock price since the election? Only puts UNH back to $52 – that is, back to the level as of September 1 2006, but still 20% below January 2006.
6. It is also important to keep in mind that UNH has many businesses besides Medicare advantage some of which are larger – and a few much larger – in terms of net revenue. The overall impact of reduced margins (not losses but reduced margins) on Medicare Advantage is not going to have a significant effect overall. That is what UNH guidance is telling us, and Wall Street seems to agree.
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 areas. Separately, CBO recently published a detailed study about issues policy makers need to consider in designing a premium support system for Medicare. It also analyzes the experience with managed competition models at certain employers as well as the structure of the Federal Employees Health Benefits Plan. The 50+ page study can be found here.
I think it is also important to note that it is easier for Medicare to get away with its dictated prices that often do not cover a provider’s cost when there are still private payers to cost shift to. I offer the following analogy to illustrate this point. Suppose a restaurant owner in Washington D.C. can provide a good quality basic luncheon meal with generous portions and good service for $10 each and earn a fair profit. Suppose government employees account for half of his business. Congress passes a law that dictates that government employees are eligible for a 20% discount on restaurant meals everywhere in town. So, they only have to pay $8 for the meal that used to cost $10. The restaurant owner then raises the cost to his private payers to $12. For simplicity sake, assume he doesn’t lose any business. Now Congress passes a new law that makes the entire population eligible for the previously negotiated / dictated government rate ($8 in this case). But the restaurant owner needs to charge $10 to cover his costs and earn a reasonable profit. What is he likely to do? I suspect he will reduce the portion size, substitute cheaper food, lay off some employees and degrade the service or go out of business. I think this is what would happen if all healthcare providers suddenly had to accept Medicare’s dictated price under a universal Medicare for all system.
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.