HEALTH PLANS: Bob Laszewski and me–right eventually?

Bob Laszewski and I have been continuing a dialog over whether Wall Street is smarter than us (obviously it’s richer than us) in ignoring the risk to health plans from the potential cuts in Medicare Advantage proposed by virtually every Democrat who matters. This continued into last week as despite a savaging of Medicare Advantage plans in a Congressional committee, Humana stock went up 5%. Humana is the biggest player in the Medicare private FFS market, which is most in the headlights of the Congressional Democrats since they noticed that it pays more than 12% more per enrollee than the regular FFS program.

But perhaps today the worm on Wall Street turneth. Most health plan stocks are down a few percent as one analyst at least was brave enough to downgrade the biggest of them (although his target price of UNH is still above where it is now!). We shall see.

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  1. Goldman gets a run for their money from Lehman when it comes to managed care analysis. Deutsche Bank made an important recent hire and may now round out the top three houses.
    As for Medicare, I think we need to distinguish between PFFS and HMO-based Medicare Advantage. PFFS is in trouble, and cuts may be made even in the next two years. The problem is that it costs more and doesn’t have anything to show for that extra money. It doesn’t (generally) manage care any more than the traditional FFS Medicare. All you’re doing is processing claims and adding marketing expenses and investors to reward.
    HMO-based Medicare Advantage is another matter, and here higher fees can be justified in terms of greater services and benefits (and of course, at the usual cost of limited networks and greater utilization controls). The HMO MA limitations are such that only 10% or so of seniors think they’re worth the added benefits, and that’s fine. These people do tend to be poorer than average. I think HMO MA will survive even past 2008 more or less intact until universal health care arrives. PFFS is in deep trouble, and I wouldn’t own Humana at even a 30% discount today as a result (they’re the major PFFS player).

  2. Yeah but AHIP is supposedly going all out on the Medicare payment issue. They pretty much have been assured that HHS will protect them though ’08. I doubt you will see any big changes in stock prices until Nov ’08 and election. Even then, it still might take a while until Democratic strategy becomes clear on healthcare.
    It is amazing how the recent Las Vegas conference with the Democratic presidental candidates really said nothing. “Universal healthcare” – Exactly what does that mean? Who knows. Edwards is only guy with a real policy paper on healthcare right now and he has no real shot at nomination anyway.
    I see status quo for at least the next two years. After that I think anybody’s guess is fair game.

  3. Humana stock price took the hit just the last election. Just prior to the election,it was trading at about $68. It fell to $51 after the election. It has recovered to $58–still down about 17%.
    Goldman Sach, which probably has the most comprehensive coverage of the managed care industry, has been really negative on UHC. They feel that UHC is most exposed to competition from nonprofits, who have limited ability to raise premium due to their bulging reserves.
    Since Wellpoint faces the least competition from nonprofits, Goldman feels that they are in the strongest position to continue with premium increases and increased operating margins.