Shares of UnitedHealth Group Inc. and Humana Inc. climbed Monday, after a J.P. Morgan analyst said the insurers should be able to grow their Medicare Advantage enrollment despite looming reimbursement cuts.
THE BIG PICTURE: UnitedHealth and Humana are the two largest providers of Medicare Advantage plans, which are privately run, subsidized versions of the federal government's Medicare program for the elderly and disabled people.
Insurers offer hundreds of different Medicare Advantage plans around the country. Shares of several Medicare Advantage coverage providers slid in February after the Centers for Medicare and Medicaid Services released data that pointed to payment cuts as steep as 8 percent for next year.
The government then softened the blow to a reduction of around 4 percent, according to some estimates. But UnitedHealth and Humana have both said recently that the cut will still be tough to stomach, given rising medical costs and other funding reductions that could hit the program next year.
Insurers have said they may have to cut benefits, raise the premiums customers pay or leave markets entirely to earn adequate profits from their Medicare Advantage coverage, and investors have been worried about the plans.
THE ANALYSIS: Analyst Justin Lake noted that he had a third-party actuarial firm conduct a deep analysis of benefit levels offered by the insurers heading into next year and 2015. He concluded that the insurers will be able to sustain membership growth, and he said in a research note they have several ways to mitigate or ease the blow from the cuts.
"Plans have absorbed significant rate cuts in the past and have also known for several years that this period of rate pressure was coming and have clearly been strategizing how to mitigate it," Lake wrote.
He raised his rating on Humana shares to "overweight" from "neutral," and he also gave an "overweight" rating to UnitedHealth after previously having no rating on the stock.
SHARE ACTION: Shares of Humana climbed 2.8 percent, or $2.05, to $75.98 Monday afternoon, while broader indexes rose slightly. That put the stock up 11 percent so far this year.
Shares of UnitedHealth climbed 2.9 percent, or $1.69, to $60.61, which translates into a 12 percent advance so far this year.