Shares of Humana Inc. rose to their highest value in more than 33 years Monday, as insurance stocks rallied after proposed government cuts to the Medicare Advantage program were less than previously expected.
Humana, the second-largest Medicare Advantage insurer, jumped 11 percent to close at $113.69 in New York, its biggest single-day gain since March 2009 and its highest value since at least July 1980, according to data compiled by Bloomberg. The Standard & Poor’s Supercomposite Managed Health Care Index of 10 companies climbed 3.4 percent.
Health insurers who run Medicare Advantage, the private version of the goverment’s managed-care program for the elderly and disabled, face a base payment cut of about 3.55 percent next year, the U.S. government said on Friday. Humana on Monday estimated the final reduction will be 3.5 percent to 4 percent, a smaller decline than the Louisville, Kentucky-based company’s previous estimate of 6 to 7 percent.
“Although we still believe rate pressure of this magnitude will present a significant challenge to the company/industry, it is certainly much better” than previous estimates, Chris Rigg, a New York-based analyst at Susquehanna International Group LLP, wrote Monday in a note to clients. Rigg predicted a final rate cut of 3.5 percent to 4.5 percent.
UnitedHealth Group Inc., the largest provider of Medicare Advantage plans, gained 3 percent to $76.01.
The proposed cuts are subject to negotiations with the industry and aren’t expected to become final until April 7.
Before last week’s announcement insurers said their total payment reduction for 2015 might be as much as 7 percent. Analysts’ estimates Monday for the final rate cut ranged from 3.5 percent to 7.5 percent.
UnitedHealth spokesman Matt Stearns couldn’t immediately comment when contacted about the Minnetonka, Minnesota-based company’s estimate. Chief Executive Officer Stephen Hemsley had estimated rate cuts of as much as 7 percent, and had said reductions of that size would be “extraordinarily disruptive.”
About 15.9 million people, or about 30 percent of Medicare beneficiaries, are enrolled in Advantage plans this year, according to February data from the government. These consumers are opting for managed care with benefits including lower out-of-pocket costs over the traditional government-run Medicare program for the elderly and disabled.
Government payments have been under pressure since 2010, when the U.S. health expansion was financed in part by reducing spending on Advantage plans by an estimated $206 billion over a decade. At the time, U.S. spending for Advantage beneficiaries was estimated to be as much as 13 percent higher than for people enrolled in traditional Medicare, leading to criticism that the Advantage plans were overpaid.
Last year, the administration raised 2014 base payments for Advantage insurers by 3.3 percent, after first proposing a 2.2 percent reduction. Still, insurers say that other government decisions — including a new tax on the industry under the Patient Protection and Affordable Care Act known as Obamacare and budget sequestration ordered by Congress — reduced their Advantage payments about 6.7 percent in total this year.
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