Insurers fret over 2014 Medicare Advantage funding

Health insurers have grown much more worried about possible cuts to the Medicare Advantage program in 2014 than investors in their stocks, according to an analyst for Citi, which recently hosted a health care conference.

Managed care stocks have slipped less than analyst Carl McDonald expected since the federal government released data earlier this month that points to possible steep Medicare Advantage payment cuts in 2014.

Medicare Advantage plans are privately run versions of the federally funded Medicare program for the elderly and disabled people, and the coverage represents a fast-growing market segment for insurers.

The Centers for Medicare and Medicaid Services said Feb. 15 that it expects costs per person for Medicare Advantage plans to fall more than 2 percent in 2014, a bigger drop than many analysts who cover the industry anticipated. They worry that this could lead to big payment cuts, since the government uses the figure as a benchmark to determine payment.

Medicare Advantage plans also face cuts from the health care overhaul and from the steep federal budget cuts that are slated to start in March. Plus, their profits also are expected to be pressured by the growing cost of care and a premium tax imposed to help fund the overhaul, which aims to cover millions of uninsured people.

The industry trade group America's Health Insurance Plans has said the payment changes could deliver a "crushing blow" to Medicare Advantage customers who could see reduced benefits, higher costs and fewer options.

CMS will announce final rates in April, and analysts have said they expect that the government will likely find ways soften the blow.

Even so, insurers are thinking about ways to cut more costs and are drawing up lists of markets they could leave depending on the severity of funding reductions, McDonald said in a research note. He said companies believe final rates will be better but probably not good enough to make their challenges disappear.

"The takeaway from our conference this year seems pretty easy to glean — the companies are a lot more nervous about the Medicare Advantage program than the market appears to be," he wrote, adding that insurers also plan a big Congressional lobbying push.

Humana Inc. and UnitedHealth Group Inc. are the two largest providers of Medicare Advantage coverage. Shares of Humana dropped 6 percent on Feb. 19, the first trading day after the CMS announcement, and the stock has since slipped more than 5 percent. UnitedHealth stock has dropped more than 6 percent since the announcement.

But McDonald noted that the shares of other insurers fell only a couple percentage points on the first trading day after the announcement.

Shares of Humana fell 76 cents to $68.45 in Thursday morning trading, while UnitedHealth fell 38 cents to $53.49. WellPoint Inc. dropped 29 cents to $62.17, and Aetna Inc. fell 26 cents to $47.27.