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 "the 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 facing 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. That will become more clear as health plans adjust to these new, lower payments—or decide that they're not even worth adjusting to.