Ahead of the Bell: Medicare Advantage stocks slip

Shares of several health insurers started slipping Tuesday before markets opened on the first trading day after the federal government released preliminary data that points to a steeper-than-expected rate cuts for Medicare Advantage plans in 2014.

The Centers for Medicare and Medicaid Services said Friday after markets closed that it expects costs per person for Medicare Advantage plans to fall more than 2 percent in 2014. The government uses this figure as a benchmark to determine payments for these privately run versions of the government's Medicare program that covers the elderly and disabled people.

Medicare Advantage plans are offered by health insurers and subsidized by the government. They offer basic Medicare coverage topped with extras like vision or dental coverage or premiums lower than standard Medicare rates. UnitedHealth and Humana are the two largest Medicare Advantage providers.

Insurers offer hundreds of different Medicare Advantage plans around the country, all with their own sets of variables like different deductibles, premiums and co-insurance.

More than 13 million people were enrolled in Medicare Advantage plans last year, or about 27 percent of the Medicare population, according to the Kaiser Family Foundation.

Analysts and some insurers had expected that benchmark rate to be flat or to rise or decline slightly.

"There's no way around it. The proposed Medicare Advantage rates for 2014 are really, really bad," Citi analyst Carl McDonald said in a research note.

He noted that Medicare Advantage plans also will face pressure in 2014 from a premium tax that helps fund the health care overhaul, the massive law aimed to provide coverage for millions of uninsured people. He said that and other pressures could add up to a rate decrease of between 7 percent and 8 percent that year, which will strain profitability, especially for smaller insurers that could be forced to leave markets.

"Many smaller plans ... don't have the resources to endure this kind of rate shock," he wrote.

Goldman Sachs analyst Matthew Borsch called the government update on 2014 rates "sharply unfavorable." But Borsch and other analysts expect CMS to soften any potential rate cuts before final figures come out in April.

BMO Capital analyst Jennifer Lynch said in another note that a disruption in the Medicare Advantage market could draw the ire of a politically powerful group.

"Seniors are paramount in politics," she said. "Retirees are a strong and growing population that donates regularly to political campaigns and shows up to the polls on election day."

Shares of some health insurers had already started sliding before markets opened Tuesday morning. Humana tumbled 9 percent, or $6.99 to $71; UnitedHealth dropped 5 percent, or $2.87, to $54.45; and shares of WellPoint Inc. fell 3.6 percent, or $2.23, to $60.47.