Medicare Advantage 2011 Rates Flat, Cuts Seen Starting In 2012

Medicare Advantage reimbursement rates for 2011 will be flat with this year's levels, as expected, which means the privately operated health plans for seniors may further pare member benefits as they try to preserve profit margins at a time of rising medical costs.

The U.S. government's Centers for Medicare and Medicaid Services announced late Monday that rates for reimbursing Medicare Advantage, or MA, plans will be the same next year as they are now, in keeping with the newly enacted health-care overhaul.

The 2011 Medicare Advantage rates substantially lower the average amount of overpayment to the private plans relative to traditional Medicare benefits. The health overhaul law requires transition parity between the two types of Medicare in the coming year, with significant cuts expected starting in 2012.

Analysts remained cautious on health insurers with significant exposure to Medicare Advantage. They include Humana Inc. (HUM), HealthSpring Inc. (HS) and Universal American Corp. (UAM).

Goldman Sachs analyst Matthew Borsch called the 2011 announcement a positive thing, as there was some concern the federal government would cut rates for next year.

"That said, MA plans will still face a (300- to 400-basis-point) gap between the flat rates for next year and projected cost trend, which will necessitate further trimming of MA-member benefits, on top of cuts made for 2010, if plans are to maintain profit margin for next year," Borsch said.

The Medicare Advantage plans will face several years of "very difficult" funding cuts starting in 2012, he added.

Deutsche Bank analyst Scott Fidel said the flat Medicare Advantage rates will track below cost growth of 4% to 6% next year.

"While MA stocks already trade at a discount to the managed-care group, we remain relatively cautious on the Ma sub-sector given negative margin prospects over the next [three to five] years due to payment cuts included in the health-reform law," Fidel said. The average MA rates are expected to decline by some 12% to 15% by 2017 from 2010 benchmark levels, he said.

Stifel Nicolaus analyst Thomas Carroll predicted the Medicare Advantage "road to parity with (traditional Medicare fee-for-service) will result in slower MA enrollment growth...and eventual industry consolidation." Medicare Advantage plans currently have a 25% penetration rate, he noted.

-By Dinah Wisenberg Brin, Dow Jones Newswires;

215-656-8285; dinah.brin@dowjones.com

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