Medicare Rate Up More Than Expected, Health Insurers To Gain

The Centers for Medicare and Medicaid Services (“CMS”), a division of the U.S. Department of Health and Human Services, has decided to raise 2019 Medicare Advantage reimbursement rate by 3.4%. Notably, CMS previously proposed a hike of 1.84% in February but this rate increase is higher than expected.

Following the announcement, shares of companies with exposure to the MA business like UnitedHealth Group Inc. (NYSE:UNH) , Humana Inc. (NYSE:HUM) and Anthem Inc. (NYSE:ANTM) rallied.

Medicare Advantage (“MA”) plans were initiated by the government some years ago to control the rising cost of Medicare, a government program for the retirees. Notably, this MA plans were administered by private insurance companies. The health insurers often add extra benefits to make these plans more appealing to consumers, thus justifying its name — Medicare Advantage. The government reimburses a certain amount per enrolee to the health insurers in return of the care provided.

Why Is Government Pitching for High Reimbursement Rates?

MA reimbursement rates for private plan increased by 0.45%, 0.85% for 2018, and, 2017, respectively. The higher-than-expected increase in reimbursement rate for 2019 is meant to attract the private health insurance players with the aim of increasing managed care participation. This move will alleviate government healthcare which is reeling under high Medicare costs.

According to CBO, total Medicare spending is expected to increase from $708 billion to $1.4 trillion from 2017 to 2027. Medicare spending is anticipated to rise more rapidly relative to GDP owing to a number of factors, including the aging population and faster growth in health care costs compared with growth in the economy on a per capita basis. In an effort to decrease the government’s burden of rising healthcare costs, it intends to rope in health insurers who are effective in managing costs.

In fact, the government has actually witnessed cost reduction by delegating Medicare to the private players and is encouraging customers to opt for Medicare Advantage. The recent higher-than-expected rate highlights the government’s efforts to stabilize these plans and provide enough resources to the insurance companies to support beneficiaries enrolled in private Medicare plans.

A Cash Cow for Health Insurers

Meanwhile, these plans have been highly profitable for the health insurers. Since MA members have higher medical utilization rates, they bring in about three times more revenues than commercial members. This trend has aided top-line growth of the companies engaged in MA. Further, the health insurers have been able to maintain profitability in these plans by keeping claim cost down via measures such as preventive healthcare and accountable care organizations. This business has proven to be boon for the health insurance industry.

In a year’s time the industry has gained 33.7% compared with the S&P 500 growth of 11.9%.

MA — the Catalyst Behind Mergers and Acquisitions in the Industry

The lucrative nature of this business along with the players’ intention to stake a claim in this rapidly growing market has fueled a number of mergers and acquisitions in the industry.

According to KPMG, MA has only been around since 2003 but it is rapidly gaining popularity as a health plan and also among seniors dissatisfied with traditional Medicare. MA plans are in great demand amid the baby boomers, a rapidly growing generation, presenting an immense business opportunity. KPMG projects the baby boomers population to be nearly 72 million by 2030 and almost 87 million by 2050. Per Anthem CEO Gail Boudreaux, 11,000 baby boomers age into Medicare eligible population ever single day.

Analysis from Strategy&, PwC’s strategy consulting business, projects annual revenues for MA plans to rise from US$215 billion in fiscal year 2017 to more than $500 billion by 2025.

The most recent merger speculation doing rounds is that of Walmart’s intention to buy Humana (which has nearly two thirds of its revenues coming from MA). Notably, this buyout also hinges around the coveted MA business. Its crystal clear that Walmart (NYSE:WMT) is planning to cash in on the MA business via Humana, an established player in this field.

Recently Anthem stated that it is working to capture its fair share of the MA market.

Other big acquisitions in this arena in were UnitedHealth Group’s buyout of XLHealth Corporation, Preferred Care Partners and Medica HealthCare Plans. Further, Cigna (NYSE:CI)'s acquisition of HealthSpring, Humana’s takeover of MD Care and Aetna Inc.'s (NYSE:AET) buyout of Genworth’s Medigap business are also noteworthy. In the same vein, WellCare Health Plans, Inc. acquired Universal American Corp. last year and is still on hunt for MA opportunities.

Bottom Line

Given that MA is one of the few areas which has a bipartisan support, its future remains bright. Industry analysts believe that the recent increase in reimbursement rates will lead to strong enrollment growth in this business in next five years.

Also the players thirst for MA business still remains unquenched; consequently we expect more mergers and acquisitions on this front.

Among the companies discussed above UnitedHealth carries a Zacks Rank #2 (Buy), while Anthem, Humana and Aetna all carry a Zacks Rank of 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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