April 5 (Bloomberg) -- Senator Charles E. Grassley said he will investigate how an investor services firm specializing in so-called political intelligence got early word of a Medicare-rate decision that led to a surge in health insurer stocks.
At issue is a private e-mail from the Washington research firm Height Analytics LLC to its Wall Street clients that Medicare rates, scheduled to drop under a preliminary decision, would increase instead. The e-mail hit at 3:40 p.m. on April 1, followed by a sharp rise in the stocks of insurers such as Humana Inc. that participate in the Medicare program.
Grassley, an Iowa Republican and his party’s top member on the Judiciary Committee, yesterday wrote the head of the U.S. Centers for Medicare and Medicaid Services demanding the timeline of a decision to reverse a planned cut to rates Medicare pays insurance companies. While it’s not clear where the information to Height Analytics came from, the letter asked the agency about anybody who might have been told of the news early, including the administration and members of Congress.
“This raises questions regarding political intelligence brokers’ ability to gather information from CMS in order to predict market moving events,” Grassley said in the letter. Past inquiries to Medicare have found the agency had “loose procedures for dealing with outside firms,” Grassley said in the letter.
April 9 Response
He asked for a response by April 9, when Marilyn Tavenner, acting administrator of the agency, is expected to appear before the Senate Finance Committee for a hearing on her nomination to head the agency permanently. The committee announced her confirmation hearing on April 2, a day after Medicare announced its rate decision.
The disclosure of the planned rate reversal by Height Analytics to clients sent shares of Humana and other insurers up as much as 9.5 percent on April 1, 40 minutes before the U.S. agency was able to make its own official announcement after the market closed. Medicare typically releases information after the market closes to prevent such stock swings.
One of Height’s founders is Andrew Parmentier, a former staffer for the House Financial Services Committee and previously an aide to former House Majority Leader Dick Armey.
“Does the political intelligence industry have advance knowledge of internal agency decision-making?” Grassley, a Republican from Iowa, asked in a statement yesterday. “Did that come from the agency, Congress, or the White House? And if so, that’s unfair to everyday investors.”
Shares of health insurers in Medicare Advantage were mixed today. UnitedHealth Group Inc., of Minnetonka, Minnesota, rose less than 1 percent to $62.10 at the close in New York. Humana, based in Louisville, Kentucky, fell 1.7 percent to $78.27 and Indianapolis-based WellPoint Inc. declined less than 1 percent to $67.99.
The incident has drawn scrutiny on the world of political intelligence firms, which sell investor clients information about what action government agencies or legislators are likely to take. Grassley has proposed having firms like Height register their employees, much as lobbyists have to do now.
“We have a right to know who’s in the business of political information, intelligence gathering,” Grassley said in an interview with Bloomberg TV yesterday. “We need to know that the same way we have a right to know who lobbies Congress.”
In an e-mail response to questions, Parmentier wrote: “We are confident our April 1 report was based on good research, conducted in accordance with the laws, rules and regulations governing the securities industry.”
After the Height memo was sent out, about 4 million shares for Louisville, Kentucky-based Humana changed hands in the last 20 minutes of trading on April 1, according to data compiled by Bloomberg. That’s equivalent to $305 million in market value and compares with a daily average volume of 2.17 million shares over the past year.
The timing of the memo, as well as the plausibility that the government might reverse itself, is what caused the markets to swing the way they did, said Jeff Jonas, an analyst with Gabelli & Co. in New York who said he doesn’t subscribe to Height’s notes.
“We know this administration wanted to make health reform work and didn’t want to cause massive disruption in the market,” Jonas said in a telephone interview. “There was also a case of pretty unprecedented lobbying by the House and Senate. That’s why the impact was probably a lot greater than normal.”
Given the potential stock swings, firms like Height are growing in Washington, as is the whole industry of expert advice and intelligence, said Les Funtleyder, president of the investment advisory division at New York-based Poliwogg LLC
“Results like this tend to build credibility,” Funtleyder said in a telephone interview. “You make a call like this, and people start to pay attention. You make a couple of good calls, and if you can deliver a product that enables people to make money, people will flock to you.”
It may be hard for the government to stop the flow of information from Washington to Wall Street. The Government Accountability Office, a nonpartisan arm of government that serves as the investigative arm of Congress, released a report yesterday on political intelligence firms that said it was difficult to find out exactly how deep the firms had penetrated.
“The prevalence of the sale of political intelligence is not known and therefore difficult to quantify,” the agency said in the report. “Even when a connection can be established between discrete pieces of government information and investment decisions, it is not always clear whether such information could be definitively categorized as material.”
There’s little question, though, that the information can offer an advantage, said Erik Gordon, a professor at the Ross School of Business at the University of Michigan in Ann Arbor.
“We have two standards here -- we have a standard for inside information coming from business corporations, and no standard for it coming from the federal government,” Gordon said. “The standard for the federal government should be higher, instead of non-existent.”
The Height memo outlined the firm’s belief “that a deal has been hatched to protect Medicare Advantage rates,” according to the copy received by Bloomberg News.
The note suggested the deal may be aimed to “smooth the confirmation” of Tavenner, who President Barack Obama has chosen to head the CMS.
The announcement by the CMS said a key rate used to determine payments insurers get for running the government’s Medicare Advantage plans would be boosted by 3.3 percent, instead of trimmed by 2.2 percent. The about-face by the Medicare agency came after insurers and Republican lawmakers complained that the Obama administration relied on faulty accounting assumptions in proposing the cut.
Height describes itself as a “privately-held capital markets firm that provides research, advisory and investment banking services,” according to its website.
Humana gained about 1.8 percent on April 1 before jumping as much as 9.5 percent after 3:40 p.m. and closing up 8.6 percent before the announcement. Humana gets 66 percent of its revenue and 58 percent of profit from Medicare Advantage, leading the industry, according to estimates by Cowen & Co. analysts.
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