ObamaCare reductions to Medicare rocks health insurers with $11 billion in cuts

Last Friday the Centers for Medicare and Medicaid Services (CMS) published its proposed payment reductions for 2014 Medicare Advantage insurance plans. The proposed cuts, estimated at $11 billion by an insurance industry trade group, sent health insurer shares plummeting on Tuesday.

Humana Inc, the nations second largest health insurer, said that the cuts proposed by CMS would negatively affect its growth in 2014. Its shares fell as much as 10 percent on the news. Insurers UnitedHealth Group Inc, Cigna Corp and Aetna Inc were down, as well.

Medicare Advantage is the private insurance option available to Medicare beneficiaries. It’s reimbursed by the government and subject to a long list of regulations enacted by the Affordable Care Act of 2010 (aka, “ObamaCare”), including Medical Loss Ratios and lower payment rates.

“These changes will disrupt coverage for Medicare Advantage beneficiaries at a time when evidence clearly demonstrates that Medicare Advantage provides higher-quality care than the fee-for-service part of Medicare,” Karen Ignagni, president of America’s Health Insurance Plans, said in a statement.

Medical Loss Ratios set the level of profits that insurers can earn on Medicare Advantage and Medicare prescription plans. In essence, starting in 2014, 85 percent of all revenues must be spent on direct beneficiary benefits.

Medicare Advantage insurers receive a set fee per beneficiary from the government to pay doctors. In Original Medicare, doctors and hospitals are reimbursed by the government based on each service they provide. About 27 percent of all Medicare recipient (14 million people) have Medicare Advantage plans in 2013.

Humana, which has about 2 million customers in Medicare Advantage, said in a regulatory filing that the government’s proposed 2014 payment rates were too low.

CMS’ proposed base payments rates for Medicare Advantage suggest a 4 to 6 percent decline in rates. On the news, Humana said it based its 2014 earnings outlook on the expectation that the base Medicare Advantage payment rate would be flat to slightly down.

Reductions in Medicare Advantage payment rates are part of President Obama’s healthcare reform plans. Medicare Advantage rates have fallen an estimated 10 percent since the Affordable Care Act was passed in 2010. An additional 8 percent savings are expected for 2014.

CRT Capital Group analyst Sheryl Skolnick said she would expect UnitedHealth to exit many Medicare Advantage markets and experience a significant or severe contraction in that business if the proposed rules become final. As with past rule changes, heavy lobbying over the next few weeks by insurers is sure to affect the final rule.

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