Humana Inc. led medical insurers higher in trading yesterday after the U.S. government reversed a decision to cut a key Medicare payment rate, offering them an increase instead.
Humana rose 5.5% to close at $79.11 in New York, and UnitedHealth Group Inc. gained 4.7% to $61.74, after the Centers for Medicare and Medicaid Services went public yesterday with the decision to do away with a planned rate reduction. Instead, insurers will receive a 3.3% increase in the rate that determines the payments they get for running the government’s Medicare Advantage plans.
Insurers had threatened to reduce benefits in Medicare Advantage plans if the cut was maintained. While the initial reduction for insurers was calculated on the basis that doctors’ pay would also be trimmed, Health and Human Services Secretary Kathleen Sebelius is now directing Medicare’s actuaries to assume Congress will keep physician fees the same.
“It’s clearly the administration’s position that changed here,” says Sheryl Skolnick, an analyst at CRT Capital Group in Stamford, Connecticut. “That’s a clear victory” for health insurers.
Humana said it was evaluating the anticipated effects the decision and other regulatory changes will have on its Medicare Advantage offerings for next year.
“We are pleased that CMS has recognized the significant negative impact the rates initially proposed for 2014 were expected to have,” the company said in a statement today.
Investors appeared to have anticipated the rate change. About 40 minutes before the reversal’s announcement, insurer shares surged. Humana jumped 8.6% in trading at about 3:40 p.m. UnitedHealth, the largest U.S. health insurer, jumped 3.1%.
“Whenever there’s a major announcement there are of course some people who anticipate this correctly,” says Utpal Bhattacharya, an associate professor of finance at Indiana University in Bloomington. Humana’s trading this week “is suspicious,” he says, because the stock rose almost as much before the announcement as after.
It isn’t clear whether traders learned of the information before it was announced or if they speculated the industry’s lobbying would be successful. A spokeswoman for the Securities and Exchange Commission, Florence Harmon, declined to comment.
The about-face by the Medicare agency came after insurers and lawmakers complained that the Obama administration relied on faulty accounting assumptions when it proposed in February to cut the Medicare Advantage rate by 2.2% starting next year. Medicare Advantage plans are used by about 13.1 million elderly and disabled Americans.
Humana gets 66% of its revenue and 58% of profit from Medicare Advantage, leading the industry, according to estimates by Cowen & Co. analysts. Minnetonka, Minnesota- based UnitedHealth and Health Net Inc., based in Woodland Hills, California, each get 25% of revenue from Advantage plans.
Health Net gained 2.6% in trading Monday. WellCare Health Plans Inc., based in Tampa, Florida, rose 5.8%. Health Net was unchanged at $29.12 yesterday, while WellCare rose 3.9% to $62.57.
As of the end of last year, more than one in five U.S. insider-trading cases involved health-care stocks, according to data compiled by Bloomberg. Pharmaceutical and biotechnology companies are particularly vulnerable to insider trading because of the large number of people with insider knowledge of market- moving events. This can include changes in regulations, government approvals of drugs, the results of clinical trials, and acquisition or partnership deals.
“A lot of people are in the know,” Bhattacharya says. “You don’t have to do anything, just get the information first.”
The most notable case of late involving health care stocks came when the U.S. in November indicted Mathew Martoma, a former hedge-fund manager at Steven A. Cohen’s SAC Capital Advisors LP. Prosecutors accused Martoma of helping the firm make $276 million on illegal tips about an Alzheimer’s drug by trading in shares of Elan Corp. and Wyeth LLC. He has pleaded not guilty to the charges and is awaiting trial.
The CMS, didn’t respond to a request for comment on the trading activity in health insurance stocks Monday.
Yesterday, Health Net increased 4.3% to $30.36 while WellCare climbed 5.6% to $63.59.
Medicare’s initial calculation for the Advantage rate assumed Congress would let stand a 25% decrease in doctors’ pay, which is a component of reimbursement to the insurance companies. That trimming of rates to physicians is required by a provision in a 15-year-old balanced budget deal that has been overridden by Congress every year since 2002 in a maneuver nicknamed “The Doc Fix.”
More than 160 lawmakers wrote the Obama administration asking for the Advantage cut to be reconsidered, according to America’s Health Insurance Plans, the industry’s Washington- based lobby group.
“CMS has taken an important step to help stabilize Medicare Advantage at a time when the program is facing significant challenges,” Karen Ignagni, the president and chief executive officer of AHIP, said in a statement.
The Medicare agency said at the beginning of March that it only assumes current law in all proposed rates. The Congressional Research Service said in a report about three weeks later that Medicare had the authority to set Advantage rates based on the assumption that Congress would pass a “Doc Fix.”
To contact the reporter on this story: Alex Wayne in Washington at email@example.com.
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