Political and Regulatory Risk
As a generalization, Democratic administrations are regarded as leaning toward views that may lead to legislative and regulatory actions reducing the profitability of health-care businesses. President Obama has announced his intention to tackle health-care reform this year, citing “the crushing cost of health-care.” A concerted effort to improve the availability and affordability of health care and insurance, to include squeezing waste and fraud out of the system, can be expected to pressure the profitability of health insurers along with everyone else in the business.
A present reality is the recent CMS preliminary announcement of Medicare Advantage rates for 2010, coming in at an increase of .5% per year, and drawing negative comment from Humana. The company has made Medicare Advantage a large and growing part of its business, and will be adversely affected by the meager rate increase. After a comment period, a final announcement is expected on April 6th.
Here is a link to a brief description of Medicare Advantage Plans. As a practical matter, Humana and other health insurers have the option of reducing benefits in order to meet the rate. Some analysts regard the dip caused by the CMS announcement as a buying opportunity, others are less optimistic.
From a long term perspective, the Medicare Advantage business is attractive due to demographics – the first of the baby boomers will soon be signing up for Medicare, to be followed by additional cohorts for decades as the U.S. population ages. Medicare Advantage has been growing as a percent of Medicare and has a value proposition and long term success driven by medical costs 15% below original Medicare.....
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