In seven months, the Patient Protection and Affordable Care Act, also known as Obamacare, will go into full effect. Meant to drive meaningful reform, the PPACA will bring millions of currently uninsured Americans into the fold, all while holding insurance companies responsible for providing patient care to all members regardless of preexisting conditions and targeted at keeping medical costs from skyrocketing.
The bill certainly isn't perfect. I've described, in detail, the benefits and the faults associated with Obamacare recently, and my Foolish colleagues have also expounded on its implications in many previous instances.
Who's leading who?
However, looking at this from the angle of an economist, and not a politician, one glaring problem has reared its ugly head twice this month that could doom one of the primary tenets of Obamacare -- namely, keeping medical costs from heading markedly higher.
If you recall, in early April the Centers for Medicare and Medicaid Services, or CMS, reversed a decision it had made in February to reduce Medicare Advantage reimbursement rates by 2.3% and actually issued a recommendation to boost Medicare Advantage rates by 3.3%. The CMS' reasoning behind the move had to do with the way it examined doctors' pay; perhaps another factor was the 160-some lawmakers and insurers who wrote into the CMS to complain about the reimbursement reduction. The move was a big boost to Humana (NYSE:HUM) and Universal American (NYSE:UAM), which derive close to two-thirds and three-quarters of their total revenue from Medicare Advantage plans. Even more so, it was a big boost for insurers as a whole who demonstrated to the U.S. government that they can still throw their weight around and get a rate increase.
Then came another announcement from the CMS on Friday that instead of the estimated 1% reduction in reimbursement rates to acute-care hospital providers, it would be recommending a 0.8% increase in reimbursements to acute-care providers, and a 1.1% increase to outpatient acute-care providers. All told, this was great news for acute-care hospital providers like Tenet Healthcare (NYSE:THC), Community Health Systems (NYSE:CYS), and the nation's largest hospital operator, HCA Holdings (NYSE:HCA), whose shareholders had been expecting reimbursement rates to fall. Admittedly this is only a $27 million bump higher in total reimbursements according to the CMS, but it's still a move in the opposite direction. Shares in all three companies surged higher on the news.
That marks two instances in just four weeks of the CMS suggesting an increase in Medicare reimbursements when a decrease had been expected.
Heading in the opposite direction?
One of the main purposes of the PPACA is to slowly wean insurers off government subsidies like Medicare. By requiring more individuals and business pay into the system through a penalty via the individual mandate, the thought process is that the U.S. government should find itself less involved in supporting the private health care industry.
However, we're seeing just the opposite as we head toward the implementation of Obamacare. With the sequester kicking in and the government having to reduce its spending by $85 billion, Medicare spending in it at least three areas (Medicare Advantage, acute-care hospital, and acute-care outpatient) is heading in the opposite direction.
Overall, this could be good news for investors in both the insurance and hospital sectors. Hospitals have been on a nearly steady rise because of the individual mandate which will require everyone to carry health insurance and should, in theory, reduce hospitals' unpaid debt accounts from uninsured patients who can't pay. Friday's reimbursement hike by the CMS was yet another accomodative move for hospitals who are looking more and more like Obamacare's biggest winners.
Insurers, though, are also hoping to gain. The medical loss ratio cap of 80%, which requires health-benefits providers to spend at least 80% of premiums on their members' health care, at first looked like a detriment to sector. But, having seen insurers successfully lobby their way to reimbursement gains with regard to Medicare Advantage, it could portend that insurers' pricing clout could partially offset the profit cap caused by the PPACA's medical loss ratio guidelines.