(Bloomberg) Humana Inc. rose to its highest value in more than 33 years on Monday, leading insurance stocks higher after proposed government cuts to the Medicare Advantage program were less than previously expected.
Humana, the second-largest Medicare Advantage insurer, jumped 11% to close at $113.69 in New York, its biggest single-day gain since March 2009 and its highest value since at least July 1980, according to data compiled by Bloomberg. The Standard & Poors Supercomposite Managed Health Care Index of 10 companies climbed 3.4%.
Health insurers who run Medicare Advantage, the private version of the goverments managed-care program for the elderly and disabled, face a base payment cut of about 3.55% next year, the U.S. government said on Feb. 21. Humana today estimated the final reduction will be 3.5% to 4%, a smaller decline than the Louisville, Kentucky-based companys previous estimate of 6% to 7%.
Although we still believe rate pressure of this magnitude will present a significant challenge to the company/industry, it is certainly much better than previous estimates, Chris Rigg, a New York-based analyst at Susquehanna International Group LLP, wrote today in a note to clients. Rigg predicted a final rate cut of 3.5% to 4.5%.
UnitedHealth Group Inc., the largest provider of Medicare Advantage plans, gained 3% to $76.01.
The proposed cuts are subject to negotiations with the industry and arent expected to become final until April 7.
Industry estimates
Before last weeks announcement insurers said their total payment reduction for 2015 might be as much as 7%. Analysts estimates today for the final rate cut ranged from 3.5% to 7.5%.
UnitedHealth spokesman Matt Stearns couldnt immediately comment when contacted about the Minnetonka, Minnesota-based companys estimate. Chief Executive Officer Stephen Hemsley had estimated rate cuts of as much as 7%, and had said reductions of that size would be extraordinarily disruptive.
About 15.9 million people, or about 30% of Medicare beneficiaries, are enrolled in Advantage plans this year, according to February data from the government. These consumers are opting for managed care with benefits including lower out-of-pocket costs over the traditional government-run Medicare program for the elderly and disabled.
Cost pressure
Government payments have been under pressure since 2010, when the U.S. health expansion was financed in part by reducing spending on Advantage plans by an estimated $206 billion over a decade. At the time, U.S. spending for Advantage beneficiaries was estimated to be as much as 13% higher than for people enrolled in traditional Medicare, leading to criticism that the Advantage plans were overpaid.
Last year, the administration raised 2014 base payments for Advantage insurers by 3.3%, after first proposing a 2.2% reduction. Still, insurers say that other government decisions including a new tax on the industry under the Affordable Care Act known as Obamacare and budget sequestration ordered by Congress reduced their Advantage payments about 6.7% in total this year.