Insurance Companies Betting on Government Health Plans

Today's Managing Health Care Costs Indicator is
$3.8 billion
Source (click image to enlarge)
Cigna agreed last week to purchase HealthSpring, a Medicare and Medicaid health plan based in Tennessee, for $3.8 billion.  This prompted Wall Street analysts to increase the valuation of Medicare and Medicaid health plans --which it says are now worth $6000 per enrollee (Medicare) and $1200 per enrollee (Medicaid.)

This is a big bet - the insurers are wagering that the Medicare HMOs will continue to be paid a hefty amount (12-13%) more than traditional Medicare on a risk-adjusted basis, leaving a nice profit margin even after accounting for costs of marketing, enrollment, and network contracting that indemnity Medicare doesn't have to worry about.

The Affordable Care Act lowers Medicare Advantage plan reimbursement by $130 billion over 10 years, and past deficit reduction bills had additional cuts, although no one is sure what the "supercommittee" will suggest, if it suggests anything at all.

Medicaid plans are being cut by all 50 states, but many of them hope to wring out some savings through sending more members into managed care, leaving this an area of potential growth.  Medicaid should also enroll an extra 16 million members as a result of health care reform - although that's been in some jeopardy due to state cuts as well. Most states intend to move more Medicaid beneficiaries into managed care - which means plans with a track record of good Medicaid management should be especially valuable.

Wall Street financiers have an incentive to project hefty insurance plan profits from government health plans in the future.  This helps convince the big four (or five) health plans to open up their wallets (reserves) and pay high valuations for other companies, which leads to higher transaction fees.  The Affordable Care Act offers some tax advantages to nonprofit health plans, but that is also apparently not making investers any less skittish about putting their dollars into health plan stock.  Government cannot keep paying more and more for health care, though, and I think fee cuts for these health plans are highly likely in the coming years.

I believe that we're likely close to the top of this market, and health plans will have to show a genuine ability to lower health care costs while satisfying their members to justify such high valuations in the future.