What are President-elect Donald Trump's plans for immigration or taxes? It's easy to gain a good understanding of what the new administration wants to do in those areas. But what does Trump plan to do with Medicare, a federal program that impacts over 55 million Americans? The most astounding thing about Trump's plan to change Medicare is: We don't really know what the plan is yet.
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Outlook unclear
Trump's seven-point healthcare plan does not specifically address Medicare. However, some of the points would impact the federal healthcare program, including repeal of the Affordable Care Act, or Obamacare, and allowing access to less expensive imported prescription drugs. However, no further information was provided about Medicare, which will begin encountering funding issues in 2028.
Since winning the presidency, though, Trump has rolled out additional details on his proposed agenda. Those details do briefly reference Medicare. The Trump administration pledges to "modernize Medicare, so that it will be ready for the challenges with the coming retirement of the Baby Boom generation -- and beyond."
Adding support
The preamble to the presidential transition website's six-point healthcare plan mentions that the goals, including modernizing Medicare, will be achieved "with the assistance of Congress." That phrase could shed some light on what modernizing Medicare could mean.
House Speaker Paul Ryan has put forward a more detailed plan called "A Better Way" that includes more details on how Medicare might be reformed. Aside from repealing changes made by Obamacare, this plan includes allowing more flexibility in benefits for Medicare Advantage plans, combining Medicare Parts A and B, gradually increasing the Medicare retirement age to match Social Security, and implementing a premium support model.
That last item would result in the biggest change to the Medicare program. Under the proposal, beginning in 2024 Medicare beneficiaries would be able to choose between private plans competing alongside traditional Medicare. A premium support payment would be paid to the healthcare plan by Medicare, with the beneficiary paying a portion of the premium. Sicker patients would receive higher premium support. Lower-income seniors would receive additional financial help for out-of-pocket payments.
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Trump has not officially announced his support for Paul Ryan's plan. However, in his 2000 book The America We Deserve, Mr. Trump wrote: "There is already a system in place -- the Federal Employees Health Benefits Program -- that can act as a guide for all healthcare reform." The Ryan plan is modeled after that program.
Potential investing impact
Should the Trump administration endorse the premium support concept in Ryan's healthcare plan, Medicare could be transformed in a huge way. If the proposal became law, it would also have an enormous investing impact.
Health insurers offering Medicare Advantage plans could gain millions of new members. This would likely translate into significantly higher revenue and profits for UnitedHealth Group (UNH +0.53%), Humana (HUM +1.85%), and Aetna (AET +0.00%). These three insurers, along with the Kaiser Foundation Health Plan, cover 53% of Medicare Advantage members.
UnitedHealth Group currently ranks as the biggest Medicare Advantage provider. Its Medicare Advantage plans also typically receive high-quality marks. In the 2016 payment year, around 57% of UnitedHealth's 3.6 million Medicare Advantage members were in plans with four stars or higher (five stars indicate the highest quality possible under the Medicare rating system). The company expects 80% of members will be in plans with four stars or higher in 2017.
If the merger between Aetna and Human goes through, though, UnitedHealth could be knocked out of the No. 1 spot. Aetna currently has 1.36 million Medicare Advantage members, while Humana has 2.83 million Medicare Advantage members. However, both Aetna and Humana committed to selling some of their Medicare Advantage plans to Molina Healthcare (MOH +1.47%) in order to address U.S. Department of Justice concerns.
Of course, the repeal of Obamacare that Trump has committed to making happen would have some negative impact on these insurers also. But that impact probably won't be too bad. UnitedHealth Group is only participating in a handful of Obamacare exchanges in 2017, down from 34 in 2016. Aetna and Humana are both reducing their presence on the Obamacare exchanges next year as well.
Long way to go
It's too premature for investors to jump on board the stocks of UnitedHealth Group, Aetna, and Humana in anticipation of major changes to Medicare. There's a long way to go before any proposal becomes the law of the land.
And we still don't know what Trump's plan for Medicare is. He might go along with Ryan's proposal, but he might not. More details are needed to know how things will unfold.
