Why Health-Benefits Providers Sank Like a Stone

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of health-benefits providers sank across the board with the Centers for Medicare and Medicaid Services proposing cuts in Medicare Advantage reimbursements. Humana (NYSE: HUM  ) and Universal American (NYSE: UAM  ) were among the hardest hit, down as much as 11% and 12%, respectively.

So what: Reimbursements for Medicare Advantage plans -- which are costlier than typical plans but offer better benefits making them more attractive for seniors -- are now expected to fall somewhere in the mid-single-digit range this year; however, no exact figure has been set in stone. Humana derived 63.5% of its total revenue from Medicare Advantage in 2012, according to MarketWatch, with Universal American garnering an even more lopsided 75% of its revenue from Medicare Advantage plans last year. A final announcement on rate cuts is expected by April 1.

Now what: While not great news, I wouldn't call this devastating news for Humana. Baby boomers have begun to retire, life expectancies are heading higher, and the expectation of health-care benefits is growing right along with them. Even with the Affordable Care Act in place to help contain wild price fluctuations, I see this reimbursement cut as a temporary thorn in Humana's side rather than something shareholders should be accustomed to. The much smaller Universal American may have more to worry about in the interim, especially given its loftier valuation relative to its industry peers.

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Related Tickers

9/30/2016 4:03 PM
HUM $176.89 Up +1.07 +0.61%
Humana CAPS Rating: ****
UAM $7.65 Up +0.15 +2.00%
Universal American… CAPS Rating: No stars