The Patient Protection and Affordable Care Act, also known loosely as Obamacare, was passed in 2010 to completely reform our current health-care system. The majority of those reforms were targeted at minimizing the rising costs of health care, requiring insurance companies to accept patients with pre-existing conditions, and protecting our hospitals and citizens by giving them access to broader forms of health coverage.
Part of those reforms -- as we found out in February through a statement released by the Centers for Medicare and Medicaid Services, or CMS -- included what was expected to a mid-single-digit drop in reimbursements for insurers who provided Medicare Advantage plans.
Medicare Advantage plans are more expensive than traditional Medicare plans, but they offer significantly better coverage -- including vision care -- and often allow for lower out-of-pocket costs, making them the perfect solution for more than 13 million seniors around the country.
There was serious concern from the get-go for insurers like Humana (NYSE:HUM), Universal American (NYSE:UAM), UnitedHealth Group (NYSE:UNH) and Health Net (UNKNOWN:HNT.DL) -- which generate 63.5%, 75%, 25%, and 25%, respectively, of their revenue from Medicare Advantage plans. These insurers made it clear that if these rates were to continue into 2014 they would simply reduce the amount of benefits offered and shrink the overall scope of the provider network.
The idea of higher premiums and fewer benefits didn't sit too well with Congressional lawmakers, insurers, or insurance advocacy groups, which took to aggressive lobbying since the decision was announced in February. Last night, that lobbying turned out to be wholly worthwhile.
As a warning shot aimed directly across the bow of Obamacare, the insurers operating in the Medicare Advantage industry were informed by the CMS on Monday that it had decided to reverse its original recommendation of a 2.3% reimbursement cut in 2013 in favor of a 3.3% increase in the rate of reimbursement!
The reversal decision came about after the assumption was made that Congress would keep payment rates to doctors from falling next year, which is in contrast to the reduction in pay rate that had been factored into the February assessment. It also acts against the premise of the PPACA, which is to wean private insurers from relying on government aid for certain health care plans, including Medicare Advantage.
The bigger story here appears to be the kick in the shin that Obamacare just took at the hands of the insurance industry. By exerting its lobbying power -- hinting at the possibility of reducing benefits for 13 million-plus seniors in 2014 -- and getting some 160 lawmakers to write letters to persuade the CMS to change its opinion, the insurance industry effectively dictated itself a raise.
From an investment standpoint, insurers like Humana and Universal American -- which have significantly more revenue and profit exposure to Medicare Advantage than anything else in the product portfolio -- should benefit the most. UnitedHealth Group and Health Net should benefit as well, although their health solutions offered are more diverse, so the impact won't be as substantial. I urged for calmer heads to prevail in February with regard to Humana, and that appears to have been prescient advice now looking back.
The score now stands: Insurers, 1; Obamacare, 0 -- whose turn is it next?
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool recommends UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.