Medicare Rate Up More Than Expected, Health Insurers To Gain

The Centers for Medicare and Medicaid Services (“CMS”), a division of the U.S. Department of Health and Human Services, has decided to raise 2019 Medicare Advantage reimbursement rate by 3.4%. Notably, CMS previously proposed a hike of 1.84% in February but this rate increase is higher than expected.

Following the announcement, shares of companies with exposure to the MA business like UnitedHealth Group Inc. (NYSE:UNH) , Humana Inc. (NYSE:HUM) and Anthem Inc. (NYSE:ANTM) rallied.

Medicare Advantage (“MA”) plans were initiated by the government some years ago to control the rising cost of Medicare, a government program for the retirees. Notably, this MA plans were administered by private insurance companies. The health insurers often add extra benefits to make these plans more appealing to consumers, thus justifying its name — Medicare Advantage. The government reimburses a certain amount per enrolee to the health insurers in return of the care provided.

Why Is Government Pitching for High Reimbursement Rates?

MA reimbursement rates for private plan increased by 0.45%, 0.85% for 2018, and, 2017, respectively. The higher-than-expected increase in reimbursement rate for 2019 is meant to attract the private health insurance players with the aim of increasing managed care participation. This move will alleviate government healthcare which is reeling under high Medicare costs.

According to CBO, total Medicare spending is expected to increase from $708 billion to $1.4 trillion from 2017 to 2027. Medicare spending is anticipated to rise more rapidly relative to GDP owing to a number of factors, including the aging population and faster growth in health care costs compared with growth in the economy on a per capita basis. In an effort to decrease the government’s burden of rising healthcare costs, it intends to rope in health insurers who are effective in managing costs.

In fact, the government has actually witnessed cost reduction by delegating Medicare to the private players and is encouraging customers to opt for Medicare Advantage. The recent higher-than-expected rate highlights the government’s efforts to stabilize these plans and provide enough resources to the insurance companies to support beneficiaries enrolled in private Medicare plans.

A Cash Cow for Health Insurers

Meanwhile, these plans have been highly profitable for the health insurers. Since MA members have higher medical utilization rates, they bring in about three times more revenues than commercial members. This trend has aided top-line growth of the companies engaged in MA. Further, the health insurers have been able to maintain profitability in these plans by keeping claim cost down via measures such as preventive healthcare and accountable care organizations. This business has proven to be boon for the health insurance industry.

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In a year’s time the industry has gained 33.7% compared with the S&P 500 growth of 11.9%.