UnitedHealth, Humana May See Surge in Medicare Advantage

UnitedHealth Group Inc. and its competitors may see enrollment increase 50 percent in their U.S.-funded Medicare plans over the next decade rather than decline as had been predicted by federal budget analysts.

Medicare Advantage plans for the elderly and disabled will swell to 21 million participants by fiscal 2023 from 14 million this year, the Congressional Budget Office said May 14 in its annual review of the federal budget. The CBO didn’t explain the revision from its earlier estimate that enrollment would fall to 11 million. A spokeswoman said the agency couldn’t publicly discuss the change.

The reversal shows that a recent slowdown in health-care cost growth may be permanent, said Joseph Antos, a health economist at the American Enterprise Institute in Washington who has advised the CBO in the past. Medicare Advantage plans, which offer added benefits over traditional Medicare such as lower out-of-pocket spending, may be able to increase those benefits as costs slow.

“CBO really seems to have accepted hook, line and sinker that we’ve seen a shift down in that spending curve in general,” Antos said in a phone interview. Advantage plans will be better at “managing unnecessary costs out of the system.”

The CBO estimates Medicare will pay Advantage plans $250 billion in 2023 compared with $145 billion projected for this year.

Program Dependence

While Minnetonka, Minnesota-based UnitedHealth is the largest Medicare Advantage provider by enrollment, Humana Inc. is among the most dependent on the program. Louisville, Kentucky-based Humana gets 66 percent of its revenue and 58 percent of profit from Medicare Advantage, according to estimates by Cowen & Co. analysts.

UnitedHealth and Health Net Inc., based in Woodland Hills, California, each get 25 percent of revenue from Advantage plans

UnitedHealth rose less than 1 percent to $62.14 at the close in New York. Humana fell less than 1 percent to $79.35. UnitedHealth shares have advanced 15 percent this year while Humana gained 16 percent.

The Standard & Poor’s 500 Managed Care Index has jumped 20 percent this year, edging gains of the broader S&P 500, as government policies on Medicare and on implementation of the 2010 health-care system overhaul turn out to be more favorable to insurers than some investors had anticipated.

Health Costs

“Membership growth has been an integral draw of the Medicare Advantage program,” helping insurers even as growth among private-sector plans has stalled, Jennifer Lynch, a BMO Capital Markets analyst in New York, said in a note to clients.

U.S. health-care costs grew at an average annual rate of about 3 percent from 2009 to 2011, measured on a per capita basis, according to the Centers for Medicare and Medicaid Services. That’s less than half the rate in 2007, and a third of the rate in 1990. Economists are debating whether the slowdown in spending is mostly an outgrowth of the recession of 2008-2009 or if more permanent changes, including efficiency and care improvements at hospitals, have played a large role.

A policy change in April by the Obama administration may also have influenced the CBO’s projections, Antos said. The administration backtracked on a proposed 2.2 percent cut in payments to Advantage plans that was based on an assumed reduction in doctor compensation. The rate will now rise 3.3 percent next fiscal year.

The Advantage program “has proven too important to undermine and we expect the Center for Medicare and Medicaid Services, along with stakeholders, to eventually identify an appropriate level of funding to support sustainable” membership growth,’’ Lynch wrote in her note.

Earnings may be harder to grow next year as a result of other changes to reimbursements, Lynch said. UnitedHealth and Humana both said on conference calls last month that even with the administration’s reversal in April, they still expect government payments to drop about 4 percent next year, even as medical costs rise. Humana said it expected enrollment to grow.

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