President's Day weekend wasn't exactly kind to health insurance investors. As you can see in this chart above Aetna, Humana, Cigna and Wellpoint all saw a big drop off between Friday and this morning.
So, what happened? In a nutshell: Late Friday afternoon, right after the market closed, the federal government cut Medicare Advantage reimbursement rates way more than anyone expected.
The change amounts, according to Wall Street analysts, to a pay cut of about 7 to 8 percent in 2014.
Health investors were already girding for a slight haircut, as the Affordable Care Act's reduced Medicare Advantage payments begin to kick in next year. There's also a new tax on health insurance plans that begins in 2014, and will cut into the margins of all private insurance products, Medicare Advantage included.What they did not expect though, was a 2.3 percentÂ reductionÂ in the per capita growth rate for each Medicare beneficiaries. Compare that to rates set for this year, which gave Medicare Advantage plans a 2.5 percent per beneficiary pay boost, meant to cover overall growth in health care costs.
"Investors hoped a positive MA growth rate would help offset some of the other negative items included in the 2014 rate package," Deutsche Bank's Scott Fidel wrote in a note to investors. "The negative MA growth rate for 2014 instead will add to the rate pressure that MA plans were already set to experience due to ACA related cuts."
One easy way for plans to deal with the rate cut would be to cut benefits, spending their reduced funds on a reduced set of benefits. The federal government, however, largely blocked this option, as health plans cannot increase monthly member cost sharing by more than $30.
Is this bad for investors? Analysts universally agree that, when the feds reduce payments for your business, it's not exactly a bonanza. Fidel wrote in his note that "theÂ operating environment will indeed get much tougher for the MA business in 2014."
Or, here's how Christine Arnold at Cowen Research put it: "The announcement represents a profoundly unfavorable and unexpected deviation from history as well as Street and industry expectations."
Is it bad for consumers? That's a trickier question to answer. America's Health Insurance Plans, which represents health insurers, describe the cuts as "a crushing blow" to seniors that "will likely result in seniors facingÂ higher out-of-pocket costs, reduced benefits, and fewer health care choices."
At the same time, it's worth keeping in mind that cuts to Medicare Advantage are a goal of the Affordable Care Act, not an unintended consequence. Right now, Medicare Advantage plans are paid $1,138 more per enrollee than the traditional Medicare program costs. The government pays the plans more than they themselves think it costs to cover a given senior (more on that here).
The question seems to be whether these cuts cull back payments to Medicare Advantage to a level where profit margins get cut or, even further, to the point where health plans decide it's no longer a smart area for investment. Â That will become more clear as health plans adjust to these new, lower paymentsâ€”or decide that they're not even worth adjusting to.