Editor's Note: An earlier version of this article had incorrect information relating to Medicare Advantage's out-of-pocket costs and conflated MA and supplemental coverage. The Fool and author regret the error.
It's been a little more than nine months since state and federally run health insurance exchanges opened for business, and we're still largely at the point where everyone involved, from consumers all the way up to the insurance companies themselves, are learning on the go.
Total enrollment of 8.1 million people handily surpassed the Department of Health and Human Services enrollment estimates for 2014, but this is just one piece in a long-term puzzle meant to reduce the number of uninsured and sign up healthy individuals who'll help insurers spread the cost of medical care across a larger number of members, ultimately reducing medical inflationary costs.
For some the effects of the Affordable Care Act's implementation worked in their favor. The expansion of Medicaid programs in 26 out of 50 participating states meant that millions of citizens who previously fell outside the scope of Medicaid coverage would now qualify for government-sponsored care.
However, for others the ACA, which is perhaps best known as Obamacare, is causing a number of unintended consequences – one of which reared its head just this past week.
UnitedHealth drops a bombshell on some of its members
According to a report from The Wall Street Journal this week, UnitedHealth Group (NYSE: UNH ) the nation's largest health-benefits provider and the biggest provider of Medicare Advantage plans, is slashing its Medicare Advantage-approved physician network by thousands of doctors as a direct response to Obamacare's implementation.
Medicare Advantage plans provide the same benefits as Medicare and potentially more, as they help fill in the gaps in some areas that Medicare doesn't normally cover. Medicare Advantage plans often offer greater rewards for members, including broader prescription drug coverage that may result in less out-of-pocket expenses, as well as routine coverage for dental and vision care visits.
For UnitedHealth, Medicare Advantage is a source of frustration since the implementation of the ACA. The reason is that as the government looks to expand Medicaid coverage to states, it's simultaneously looking for ways to reduce government-sponsored payments to private businesses. The Obama administration has laid out plans to remove $150 billion in Medicare payments to insurers over the next decade partly to help pay for other aspects of Obamacare's implementation.
The health-benefits balancing act
The end result is that Medicare Advantage insurers are on the path toward receiving less in per-capita reimbursements. UnitedHealth, for example, could choose to raise premiums in an effort to recoup this projected decrease in reimbursements, but doing so could also have the effect of creating sticker shock with its elderly consumers and chase them to a competitor.
The other option, as we saw this week, is UnitedHealth can simply cut its costliest health-care providers out of the network in order to save money. Because health-benefits providers receive their reimbursements based on a combination of cost and quality provided, UnitedHealth has to maintain a very discerning eye on the costs associated with its Medicare Advantage provider network in order to appease regulators and its members, while also growing its bottom-line and expanding its member base.
Yet, this isn't just a burden on UnitedHealth's bottom-line – it could become a big problem for some of its members who now need to find a new doctor, or perhaps a new plan altogether. If UnitedHealth isn't careful its public perception could turn decisively negative and hurt not only its existing Medicare Advantage customer base, but any chance it had of gaining new members down the road.
Of course, it's not just UnitedHealth that'll be affected by long-term Medicare reimbursement cuts associated with Medicare Advantage plans. In addition to UnitedHealth, Humana (NYSE: HUM ) , Universal American (NYSE: UAM ) , Health Net (NYSE: HNT ) , and WellPoint (NYSE: ANTM ) all have exposure to these health plans.
Specifically, Universal American, Humana, Health Net and UnitedHealth receive around 75%, 64%, 25%, and 25% of their total revenue from Medicare Advantage plans, so any major fluctuations in reimbursement rates from the Centers from Medicare and Medicaid Services could drastically alter the profitability of these aforementioned companies. For WellPoint, which is already profitable from its Obamacare individual plan enrollees, potential Medicare Advantage cuts may sting a bit, but they likely won't be too noticeable over the long run.
None of these other four health-benefits providers have announced plans to cut physicians from their network to the same magnitude as announced by UnitedHealth.
You're forgetting one thing...
But here's one thing to consider: together these insurers have a lot of clout. We know reimbursements cuts are eventually coming, but don't count on these insurers to simply lay down and let the CMS propose annual Medicare cuts without putting up a fight.
If you recall, the CMS attempted to enact a 2.3% decrease in reimbursements for insurers who provide Medicare Advantage plans in February of last year. Generally, when the CMS offers a rate increase or decrease proposal for Medicare reimbursements it allows a 30-day period for business and interested parties to openly voice their opinion.
Following this 30-day period, as well as a mammoth lobbying effort by Congressional lawmakers, insurance advocacy groups, and the insurers themselves, the CMS eventually reneged on its decrease proposal and announced a 3.3% increase in Medicare Advantage reimbursements. And more recently, what was originally intended to be a 1.9% decrease in Medicare Advantage reimbursements for 2015 was reversed to a 0.4% increase. I would suggest that these flip-flops from the CMS could give insurers that offer Medicare Advantage plans the confidence to fight for future increases tooth and nail.
In other words, the reality of what's likely to happen over the coming years probably lies somewhere between the proposed extremes: the Obama administration's $150 billion in projected cuts and the Medicare Advantage sector lobbying for a hike in reimbursement payouts. We just don't know for certain as of yet how aggressive the CMS will get with their rates cuts and how insurers will respond with regard to maintaining their doctor networks in lieu of these expected cuts. Either way, this is a situation that all Americans and investors, regardless of age, should be monitoring.
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