Here's the good news for health insurers: The Centers for Medicare and Medicaid Services (CMS) increased next year's payments for Medicare Advantage by more than the amount the agency proposed back in February. The bad news? The difference between the actual 0.8% increase and the proposed 0.5% increase isn't going to mean a whole heck of a lot.
With the increased costs of services, that 0.8% isn't going to cover it. Insurers like Humana (NYSE:HUM), Coventry Health Care (NYSE:CVH), and UnitedHealth Group (NYSE:UNH) are going to have to raise the prices of their Medicare Advantage plans to keep their margins at a reasonable level. That could cause seniors to flee back to government-run Medicare, although probably not all of them; there's a reason they left Medicare to begin with.
Congress could still save the companies somewhat. The puny increase in payments is partially due to an expected 21% decrease in Medicare payments to doctors. If Congress increases those payments, like it's done in the past, CMS could increase the payments to the insurance companies.
This is only the first in a series of changes that the Obama administration has in store for the health care industry. Insurers like Aetna (NYSE:AET), Cigna (NYSE:CI), and WellPoint (NYSE:WLP) with less exposure to Medicare Advantage aren't out of the woods yet, since one possible outcome of Obama's attempt to get more Americans insured would be to set up government-run insurance for non-seniors. Whether the government could run it effectively enough to compete with health insurers remains to be seen, but added competition certainly won't help margins.
The health insurers are fairly cheap right now, with many trading at P/Es in the single digits, but there's also a quite a bit of uncertainty about their futures. Investing now could result in huge returns if everything turns out all right, but Foolish investors would be wise to keep them at a reasonable portion of their portfolio.
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