President Barack Obama's proposed budget for the next fiscal year was a mixed bag for the health-care sector.
Bad news for Medicare recipients
At least it's bad news for those seniors rich enough to afford paying a little more for Medicare.
President Obama's budget establishes five new income brackets that would have to pay increasingly higher premiums. Right now, there are four brackets starting with singles making more than $85,000 per year or couples earning more than $170,000. In addition to the new brackets, the proposal would increase the premiums.
The end result is $50 billion in the government's coffers over 10 years, nearly double the estimate of last year's income from premium increases for higher-income seniors. Right now, 1 in 20 Medicare recipients pay a higher premium, which will increase to 1 in 4 as the income tiers kick in. At that point, the tiers will increase, adjusting for inflation.
It's hard to see how this could hurt drugmakers. Even with the increased premiums, Medicare is still a pretty good deal. Most seniors will grin and bear it, keeping coverage.
Health insurers such as Universal American (NYSE:UAM) and Humana (NYSE:HUM) that offer supplementary Medicare insurance could be hurt if seniors decided to drop the added coverage, but I doubt the increased premiums will put a major dent in seniors' budgets. Retirees making more than $85,000 per year will have to pay about $250 more per year than they do right now. Any losses will be more than be made up for by the Centers for Medicare and Medicaid Services' decision this month to reverse its previously announced cuts to reimbursement rates.
Good news for hospitals
Obama's budget proposes to help hospitals such as Health Management Associates (UNKNOWN:HMA.DL), HCA Holdings (NYSE:HCA), and Community Health Systems (NYSE:CYH). Hospitals have routinely been given Disproportionate Share payments from Medicaid to help pay for uninsured patients that the hospitals treat but aren't reimbursed for.
The Patient Protection and Affordable Care Act was expected to make those payments unnecessary through the expansion of Medicaid. The uninsured patients that the federal government was picking up the tab for would now be covered under Medicaid.
But, you'll recall that the Supreme Court said the expansion was optional for states since the federal government doesn't pick up the full payments. Quite a few states have used their new-found power to turn down the expanded Medicaid, leaving hospitals in the same situation they're currently in.
Obama's budget proposes to delay the cuts to the Disproportionate Share program, sending $500 million to hospitals that was scheduled to be cut in 2014. Indirectly, the extra payments are good for insured patients and the companies they have their insurance with since hospitals would surely try to pass some or all of the added burden onto paying customers.
At this point, it's only a temporary fix, though; hospitals are still scheduled to see cuts to Disproportionate Share payments starting in 2015, which culminate in a $4 billion reduction in 2022.
Just a suggestion
Keep in mind that the President's budget is just a proposal to Congress, which ultimately sets the budget. Investors need to keep one eye on Wall Street and the other on Washington D.C., since the latter can have substantial influence on health-care spending.
Fool contributor Brian Orelli has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.