The future of the Patient Protection and Affordable Care Act became clearer over the past few days. The government has formalized financial details pertaining to Medicare Advantage rate cuts and for the future Medicaid expansions.
Health insurers popped before market close Monday as investors awaited the Medicare Advantage announcement. The gains continued after Tuesday's open, with Humana (NYSE: HUM ) and UnitedHealth Group (NYSE: UNH ) leading the S&P 500 with gains of around 5% today.
What do the finalized decisions mean for the future of these government-sponsored plans?
Medicare Advantage rates rise
Medicare Advantage plans won't suffer the rate cuts in 2014 that the Centers for Medicare and Medicaid Services proposed in February. Participating insurers will instead receive a 3.3% increase in payment reimbursements.
The CMS previously proposed a slash, which sent Humana plummeting 10%. But opponents pointed out that the reduction was based on the assumption that Congress would approve a physician rate cut, which hadn't happened in the past decade.
Humana has the most reason to celebrate, since its Medicare Advantage segment accounted for 53% of overall revenues in 2012. But UnitedHealth purchased XLHealth last year to increase its Advantage presence. With so many factors still undecided, the rate finalization offered a rare bit of good news for insurers.
Medicaid funds secured
In other Obamacare news, the Department of Health and Human Services recently formalized federal Medicaid financing plans that put the feds on the hook for 100% of expansion costs for the first three years, starting in 2013. The payments will gradually decrease to the permanent rate of 90% by 2020.
The information matched the figures that HHS had touted for months as it tried to get more states onboard with the expansion. But the majority of states remain either on the fence or firmly opposed. Expansion would broaden the coverage umbrella to include patients below age 65 who have income that's 133% above the federal poverty level.
Many continue to pursue waivers that would allow for the use of federal money in purchasing private plans. The HHS has said the option remains and extended a waiver to Arizona. But other states have found that approval isn't guaranteed.
WellPoint (NYSE: WLP ) is positioned to benefit from the potential expansions thanks to the Amerigroup acquisition last year, which increased its Medicaid presence.
Foolish final thoughts
Health-care investors -- and wonks -- face an interesting few months of watching the ACA plans continue to fall into place. The Advantage rate turnaround should encourage some optimism. Potential Medicaid benefits for insurers will become somewhat clearer once more states make their decisions. But that could become a long wait, since there's not a deadline on opting in or out of the expansion.
Regardless of how the Medicaid expansion pans out, there's one macro trend Warren Buffett has referred to as "the tapeworm that's eating at American competitiveness". What was he referring to? Find out in our free report: "What's Really Eating at America's Competitiveness." You'll also discover an idea to profit as companies work to eradicate this efficiency-sucking tapeworm. Just click here for free, immediate access.