Washington to Debate Medicare and Medicaid Cuts – Market Reacts Negatively

Although Congress is in recess for the week, news about pending legislation continues – to which markets tend to respond negatively.

The Washington Post reported that President Barack Obama favored replacing the automatic cuts slated to take effect on March 1 with a combination of budget moves, including spending cuts in Medicare and Medicaid.

According to Bloomberg, U.S. Representative Chris Van Hollen said he's willing to consider combining Medicare's Part A and B (which pay for hospital and doctors' services) to wring inefficiencies out of the health-care program for the elderly.

Roll Call reported that a pending budget proposal from House Republicans won't be "significantly different" on Medicare – except for the fact that it will balance in 10 years rather than over several decades as originally proposed, according to Rep. Tom Price of Georgia, vice-chairman of the House Budget Committee.

Also, Medpage Today reported that battle lines have shaped up now that President Obama has renewed his call to allow Medicare to negotiate drug prices directly with pharmaceutical companies, a plan opposed by the powerful pharmaceutical lobbyists.

Add to that a news release late Friday from the Centers for Medicare and Medicaid that announced proposed cuts in Medicare Advantage reimbursement rates.

Humana HUM saw shares take a dive Tuesday, tumbling more than eight percent at one point but ended the day down 6.4 percent. Humana relies on Medicare Advantage business for nearly two-thirds of its revenue.

Another big player in Medicare Advantage, Universal American Corp UAM, plunged nearly five percent on news of the proposed cuts. Universal had three-fourths of its revenue coming from the government program during the first nine months of the 2013 fiscal year. Full-year results are due out this week.

Analyst Matthew Borsch of Goldman Sachs said he would keep his Sell rating on both Humana and Universal. In a morning note to clients, Borsch said further declines in Medicare Advantage earnings are on the horizon.

Hardest hit among all health insurers was eHealth EHTH, which fell 17 percent to $16.30.

EHealth had already lost a fifth of its value Friday on missed earnings and a lowered outlook for 2013. The online insurance broker’s ability to survive while state health insurance exchanges were being set up is a bigger concern, according to analysts. The prospect of lower Medicare rates is likely to cut into EHealth’s ability to compete even further.

Among other healthcare related stocks, UnitedHealth Group UNH, Cigna Corp. CI, and Aetna AET were each down about 1 percent and HealthNet HNT was down more than 1.5 percent on Tuesday.