Sector Wrap: Health insurers fall on Medicare bill

On Wednesday, the Senate passed a new Medicare bill with a 69-vote majority--which, if it holds, would be enough to override a threatened Presidential veto and make the bill into a law. The bill would lower payments to Medicare Advantage, which covers 9 million elderly and disabled patients. Democrats have charged the plans pay too much money to insurers.

Friedman Billings Ramsey analyst Andrew Parmentier described the change as "The beginning of a slow bleed for Medicare Advantage."

BMO Capital Markets analyst Dave Shove agreed that Congress is now clearly willing to take funding from Medical Advantage. He noted that the bill reverses a proposed cut in reimbursement for doctors, and said the funding came out of Medicare Advantage.

The Congressional Budget Office said the changes will reduce payments to health insurers by $13.5 billion, and reduce Medicare Advantage enrollment by 2.3 million--to 12 million in 2013 from an estimate of 14.3 million.

The CBO said the change would eliminate payments for indirect medical expenses, which are made to hospitals and health care providers.

Goldman Sachs analyst Matthew Borsch said the law would basically eliminate Medicare Advantage private fee-for-service plans, in which insurers offer Medicare benefits to patients along with other benefits. The plans are created through contracts between the insurer and the Centers for Medicare & Medicaid Services.

Borsch said the cuts to Medicare Advantage were considered inevitable on Wall Street.

Scott Fidel of Deutsche Bank said WellCare Health Plans Inc., Coventry Health Care Inc., Humana Inc. and United American Corp. will take the largest hit. Wachovia analyst Matthew Perry said the bill hurts large companies only slightly, and is a bigger problem for small plans.

Shares of WellCare dropped $4.64, or 12.6 percent, to $32.06. Fidel also lowered his estimates and price target on WellCare due to ongoing investigations into the company.