By Jon Kamp
The Wall Street Journal, April 3, 2013
Washington wants to get tough on spending — but in the latest round of payment rates for private Medicare plans, insurers emerged victorious.
Shares of health insurance companies soared Tuesday after federal officials scrapped proposed payment cuts to carriers that run Medicare plans amid pressure from senior citizens and lawmakers.
Insurers including Humana Inc., UnitedHealth Group Inc. and Cigna Corp. get paid by the federal government to run Medicare plans for more than 14 million Americans. Known as Medicare Advantage plans, the policies have been a growth spot for insurers as baby boomers turn 65 and appeal to seniors with perks like free gym memberships. Nearly one in three people on Medicare is on such a plan.
In February, the federal agency that runs Medicare proposed steep rate cuts to insurers for running these plans, on top of another layer of cuts called for in the federal health overhaul. One key payment metric was set to fall 2.2% under the initial proposal.
That set off the insurance industry’s most intense lobbying campaign in years, according to those involved, and it brought together an unusual coalition of Republican and Democratic lawmakers to push for stopping the cuts.
Lobbyists organized a grassroots effort that recruited 50,000 seniors to contact members of Congress through phone calls, emails or other methods. They warned that cuts would hurt benefits to seniors while driving plans from some parts of the country.
The effort found a receptive audience, with more than 160 lawmakers signing letters supporting industry-friendly changes. The rate changes were slated to take effect in 2014, just as all House lawmakers and several key senators stand for re-election. One key ally: Sen. Max Baucus (D., Mont.), the chairman of the committee that oversees Medicare, who could face a difficult campaign next year.
With this strong backing, insurers won the biggest item on their wish list: an unusual change in how the Centers for Medicare and Medicaid Services factors in rates it pays doctors, which has a big effect on how much the government pays companies running Medicare Advantage plans. Historically, the agency, known as CMS, has calculated the payment rates under the assumption that a cut in Medicare payments to doctors — estimated at roughly 25% next year — would take effect even though Congress typically delays it.
This time, Health and Human Services Secretary Kathleen Sebelius intervened to let the agency assume the doctor-payment cuts wouldn’t take place, according to CMS’s late Monday announcement. That allowed federal officials to significantly lessen the proposed cuts for insurers. Instead of a 2.2% cut to the key payment metric, Medicare on Monday announced a 3.3% increase.
The delay in the cuts underscores how difficult it is for lawmakers to pare federal spending on health care, which is a main driver of the deficit.
“It’s the old Potomac two-step on Medicare,” said John Gorman, executive chairman of Gorman Health Group, a Washington health consultancy. Lawmakers “slice and dice Medicare in their budgets, and then walk it back when they have to go home and face their constituents,” he said.
Among big insurers, the changes are most meaningful for Humana, which is more tethered to Medicare plans than its large peers. Humana shares rose 5.5% to $79.11 Tuesday, adding to an 8.6% rise Monday, when most of the jump came right at the end of trading, just ahead of the announcement from CMS on the increase in payments.
After Humana, UnitedHealth has the most Medicare Advantage exposure among big insurers, Jefferies analyst David Windley said, followed by Cigna and then Aetna Inc. UnitedHealth shares surged 4.7% Tuesday, while shares of Cigna and Aetna rose 2.9% and 3.7%, respectively. All of the insurers’ stocks added to gains Monday.
While rate estimates varied, analysts broadly said the savings were significant.
Mr. Windley estimated rates next year will now be down by just 1.75% to 2.75%, rather than the 7% to 8% implied by the mid-February proposal. Insurers still face cuts in Medicare Advantage payments under the 2010 Affordable Care Act, which the agency didn’t reverse.
Humana Chief Executive Bruce Broussard cited some “technical adjustments” within the complicated rate announcement that “may still present meaningful challenges in certain geographies.”
CMS’s office of the actuary indicated it disagreed with Ms. Sebelius’s decision to calculate the payment rate under the assumption lawmakers will stave off the doctor-payment cuts. “The assumption conflicts with the office’s professional judgment that, as in all past years, the determination should be based on current law, not an assumed alternative,” the rate announcement said.
Richard S. Foster, the recently retired chief actuary at CMS, said Ms. Sebelius’s intervention was highly unusual and “disturbing.”
“The solution to a problem caused by legislation that’s not working should be new legislation,” Mr. Foster said.
CMS declined further comment on why Ms. Sebelius intervened beyond Monday’s explanation that CMS shifted gears to better reflect likely congressional action on doctor payments.
Brody Mullins and Janet Adamy contributed to this article.
