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Will This Medicare Twist Cause You Pain?

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Imagine you're a member of Congress. While you're accustomed to spending money hand over fist (and hand over every other part of the body, for that matter), you know deep down in your gut that the spending needs to gain some semblance of control. Now imagine that one of your staff brings to your attention a recent finding about a twist in Medicare managed care that could mean that the insurance companies running these programs are paid too much.

Your immediate response is, "Aha! Here's a way to cut costs that won't make me lose votes in the next election! We'll just pay those evil insurance companies less." You direct your staff to put together legislation to reduce Medicare spending. While, like many members of Congress, you won't actually read the bill that you vote for, you will feel good that you have helped taxpayers save money. As for those insurance companies, who cares? 

This scenario could be played out in the halls of Washington, D.C. in the not-too-distant future thanks to a recent report from a researcher at the Centers for Medicare and Medicaid Services, or CMS. Here's the background -- and what it could mean.

The twist
Gerald Riley at CMS decided to look into what happens with members of Medicare Advantage plans who switch over to traditional fee-for-service Medicare. What he found was that these members incur costs nearly 28% higher than similar members already in fee-for-service plans. The members who were initially in Medicare HMOs had the biggest cost difference.

Another study published in December in Health Affairs found that members who left Medicare Advantage plans to join traditional Medicare were "much more likely" to report worsened health than other Medicare beneficiaries. However, according to the researchers, changes made to Medicare Advantage in 2006 that limited members to switching only once per year did help improve the situation.

Neither of these two reports suggested that organizations offering Medicare Advantage programs were somehow cherry-picking healthier members. The implication, though, is that insurers running Medicare Advantage could be benefiting financially by not having to pay higher medical costs for patients who switch to traditional Medicare.

Washington to the rescue
Don't think for a minute that politicians won't jump to find ways to "fix" this issue. Expect alternatives along two general lines of thinking.

One approach could be to try to force Medicare Advantage programs to offer fewer limitations, therefore becoming more like traditional fee-for-service. The problem with this approach is that such actions could undermine the principles of managed care that seem to be working. 

Advocates for applying these principles to Medicare point to several examples of success. For instance, another report in the same issue of Health Affairs found that members of Medicare Advantage plans were admitted less frequently to emergency rooms, had fewer elective surgeries, and obtained some types of recommended care more often. Another study by the Agency for Healthcare Research and Quality concluded that members of managed-care plans were less likely to require hospital treatment.

A second approach for addressing the issue could be to simply pay less per enrollee to companies offering Medicare Advantage programs. The thought behind this option is to shift the cost of the sicker patients who leave the managed-care plans back to the insurance companies. The politics of this approach will probably make it an appealing one to take for many on Capitol Hill.

A twisting pain?
Do investors in insurers who run Medicare Advantage programs have reason to be concerned if either of these "fix it" approaches are taken? Probably so. Undermining the managed care principles behind Medicare Advantage would cause insurers' costs to go up. More federal reductions of payments would hurt revenue.

One insurer that would probably be hit particularly hard is Humana (NYSE: HUM  ) . The company received 71% of its total premiums and service revenue from Medicare products in the first nine months of 2012. 

UnitedHealth (NYSE: UNH  ) obtained around 29% of its premium revenue from CMS last year, most of which was for Medicare plans. WellPoint's (NYSE: ANTM  )  consumer segment, which includes its Medicare Advantage programs, accounted for nearly 32% of premium revenue in the first nine months of 2012. Cigna (NYSE: CI  ) is a little less exposed, with 25% of premium revenue during the first nine months of last year stemming from Medicare.All four insurers are growing their Medicare Advantage businesses.

These companies and their investors probably won't be the only ones experiencing pain, though. If profit margins for Medicare Advantage diminish, the most likely source for mitigating the damage will be to increase premiums for commercial insurance. That could mean that this new twist could have many employers and employees squirming.

Here to help
Maybe Congress will consider a third approach, though. The studies appear to indicate that Medicare Advantage plans are controlling costs, but some members who get sick are switching to fee-for-service. Another alternative is to develop incentives (either carrot or stick variety) to keep these patients in managed care programs. That could help lower overall costs in the long run.

Solving our nation's health-care cost problems won't be easy, regardless of which route is taken. However, in times like this, I can't help but remember the words from former President Ronald Reagan: "The nine most terrifying words in the English language are, 'I'm from the government and I'm here to help.'"

With plenty of regulatory uncertainties, many investors looking at managed-care companies could benefit from real help in deciphering what it all means. In this brand new premium report on UnitedHealth, we take the long term view, honing in on prospects for UnitedHealth in a post-Obamacare world. The report also comes with a full year of analyst updates to keep you covered as key news develops, so don't miss out -- simply click here now to claim your copy today.

Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 07, 2013, at 4:37 PM, clo7clo7 wrote:

    Providers of Medicare Advantage plans can indeed cherry-pick their customers as they send salespeople over to visit prospects in their homes. That enables the salespeople to see how healthy the prospects seem to be, and to observe their home environment. While the company cannot refuse to enroll a person who wants to enroll in its plans, the salespeople can influence the decision. Really, really sick people are probably unable to complete the paperwork needed to enroll in Medicare Advantage plans, which leaves them in the default plan, which is Medicare. Thus Medicare is bound to have worse experience than the insurance companies.

  • Report this Comment On February 08, 2013, at 7:53 AM, kcm310 wrote:

    Although at first glance the 28% seems impressive the more important question to ask is "what are the outcomes"? In other words, you may have a patient who belongs to an MA plan and has been diagnosed with a certain condition and prescribed a therapy. If that patient left the MA plan and went back to fee for service and spent 28% more more money for a different therapy did he or she do any better? This is the true way to measure the effectiveness of MA plans.

  • Report this Comment On February 08, 2013, at 8:02 AM, kcm310 wrote:

    With all due respect to clo7clo7, the scenario described in the 2/7 post is unlikely and prohibited by Medicare. MA plan sales agents make a commission for every sale they make and the commission amount is, in most cases, dictated by Medicare. If a sales agent can make a sale and doesn't he or she doesn't get paid. Furthermore because MA plans typically have richer benefits than fee for service they tend to attract sicker patients. Finally most MA plans offer very simple ways to enroll including via telephone.

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