Medicare passes on big profits to insurers

@CNNMoneyInvest December 22, 2011: 12:45 PM ET

The U.S. government pays 10% more for private insurance run by firms like Humana, WellCare Health Plans, and Centene -- some of 2011's best performing stocks.

NEW YORK (CNNMoney) -- This has been a volatile year for the stock market. But one sector has been consistently earning a windfall for investors: health insurers that provide private Medicare plans to seniors.

Among the top-performing Fortune 500 stocks of 2011, three - WellCare Health Plans (WCG, Fortune 500), Humana (HUM, Fortune 500), and Centene (CNC, Fortune 500) -- were health insurers with a high proportion of Medicare Advantage enrollees. WellCare's share price has nearly doubled while Humana and Centene are up about 50%.

UnitedHealth Group (UHC) and Aetna (AET, Fortune 500), each with significant shares of Medicare Advantage patients, also inked gains of more than 35% in 2011.

"There's a nice long-term thematic story here," said Thomas Carroll, a health insurance analyst at Stifel, Nicolaus & Co. "More people will join the Medicare pool each and every year for the next 10 to 12 years. Many of those will choose Medicare Advantage."

Health care stocks have broadly outperformed the market in 2011. The iShares Dow Jones US Health Care Providers Index Fund (IHF), an exchange fund that includes most of the major insurers, is up more than 8%. So is the Health Care Select Sector SPDR (XLV) ETF.

But what's been so profitable for health insurers is also adding to the U.S. government's roughly $15 trillion debt burden.

Medicare doctors fed up with Washington

The bill for Medicare Advantage, where private insurers serve as healthcare administrators for seniors, currently costs taxpayers 10% more than traditional Medicare where the government serves as the middleman, according to the Congressional Budget Office.

So far, it's unclear whether seniors actually get better quality care or services for the extra fees, said Marsha Gold, a senior fellow at the non-profit Mathematica Policy Research who has studied Medicare Advantage plans.

Traditional Medicare plans typically force seniors to pay monthly premiums and deductibles for other medical expenses like hospital stays and prescription drug benefits. By contrast, seniors might pay a single monthly premium for a Medicare Advantage plan and have everything covered.

The downside is that these plans restrict which physicians a senior citizen can see and what hospitals they can use. Unlike most health insurance plans, many Medicare Advantage plans do not provide any reimbursement for out-of-network doctors or hospitals.

Such restrictions can be particularly dangerous if a Medicare Advantage patient is required to see a subspecialist when one might not be included on the plan.

Fortune 500: Top-performing stocks of 2011

Dr. D.J. Verret, an ear, nose, and throat surgeon in Plano, Tex. said he received an inquiry from a Medicare Advantage patient who couldn't find a surgeon to conduct voicebox surgery to remove a cancer lump in her esophagus. "There were only two ENT physicians on her plan, and neither of us perform that type of surgery," said Verret.

Since reimbursement rates for physicians are generally at or below Medicare rates, there's little incentive for doctors to sign onto these plans, said Verret. But he said he has chosen to sign contracts with Medicare Advantage plans because he specializes in skin cancer reconstructive surgery in which mostly seniors are patients.

"The biggest problem is that seniors usually are not educated and think they can go to any Medicare doctor, but they can't," said Verret.

Still, the lure of a single premium and a seemingly simple plan has been drawing new enrollees to Medicare Advantage. Roughly 25% of seniors were covered by these private programs in 2011, nearly double the number in 2004.

WellCare's enrollments jumped 10% in the third quarter, mostly due to an increase in Medicare Advantage members. The increase helped the firm nearly double its third-quarter profits and raise its 2012 outlook.

Humana also reported an 11% jump in third quarter revenue and boosted its 2012 earnings-per-share outlook by roughly 56% after enrollment outpaced the company's earlier forecasts.

Part of this year's sharp uptick in managed care health insurance stocks comes from a low base. Shares had been battered between 2008 and 2010, as investors largely fled the sector over fears about health care reform.

The future for these stocks under health care reform is unclear. In an attempt to get costs for Medicare Advantage in line with traditional Medicare, the government plans to force insurers to hit certain benchmarks to push costs down.

But there will be loopholes and rebates for "higher quality plans." What constitutes quality is still being determined and will likely leave a lot of wiggle room for potential winners and losers.

"There's a scarcity value here," said Chris Rigg, an analyst at Susquehanna Financial Group. "It's hard to find growth in large cap health care stocks, but Medicare Advantage is one area where you can find it."  To top of page

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