Humana, Cigna Bomb Latest Medicare Plan Ratings; Shares Slide

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Shares of Humana Inc. (Louisville KY) sank 5% through Thursday, Oct. 13, after the insurer indicated a downgrade in a key Medicare quality measure could lower its federal reimbursements. Although the company raised its full-year guidance, and argued that the ratings don’t reflect its current business, shares tumbled nonetheless.

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The government uses a five-star rating system to evaluate the health-plan offerings. Plans with higher ratings get bonuses, plus bragging rights to ballyhoo to Medicare enrollees. The star ratings out on Wednesday, Oct. 12, are used for the 2018 plan year.

So-called “Star-quality” ratings show that the percentage of Humana’s July 31 membership in 4-star plans or higher declined for the 2018 plan year to about 37%, or 1.17 million members, from about 78%, or 2.15 million members, a year ago, according to the Centers for Medicare and Medicaid Services.

The health insurance and services company historically has performed strongly in the star ratings, according to The Wall Street Journal. Humana said its star ratings for the 2018 bonus year “do not accurately reflect the company’s actual performance under the applicable star measures.

Humana also said it was planning to take actions in the coming quarters “to mitigate any potential negative impact of these published ratings on star bonus revenues for 2018,” including seeking reconsideration of certain ratings.

The CMS revision is a “substantial negative,” Chris Rigg, an analyst with Susquehanna Financial Group who rates Humana’s stock Neutral, said in a note. He warned that the reduction in the quality ratings could have a “substantial impact” on Medicare rates paid to Humana, potentially creating a “5% or greater reimbursement hole that needs to be backfilled” by changing plan designs to maintain margins and membership, according to The Journal. The situation could impact Humana’s 2018 results, he said, and could put the company at a disadvantage in enrolling new Medicare members.

Chiming in was Wells Fargo analyst Peter Costa, who said in a research note, “Weakness in Humana’s ratings is a surprise and could hurt [the company’s] competitive positioning for 2018.”

For its fiscal 2016, which ends in December, the company now expects adjusted earnings of $9.50 a share, up from its previous guidance for $9.25 a share, according to CNBC. Humana said the expected earnings increase comes mostly from better-than-anticipated performance in its Medicare Advantage and its Healthcare Services units. For the quarter ended Sept. 30, the company raised its guidance to $3.15 a share from $2.77 a share.

However, the company also said another measure, the Healthcare Effectiveness Data and Information Set, or HEDIS, is at a record high. Humana said it doesn’t expect this development to hurt its Medicare membership growth next year.

Late Wednesday, Cigna Corp. (Bloomfield CT) also said it was facing “certain reductions” to its Medicare star-plan quality ratings, which it said in a filing are mostly attributed to a previously disclosed audit by CMS. It said under the newly-unveiled ratings, about 20% of its Medicare Advantage enrollees would be in a four-star plan. Like Humana, Cigna said it didn’t believe the new ratings accurately reflect its offerings, and it said it will “work fully with [the Medicare regulator] through their process” to try to improve the findings. Cigna’ shares also dropped 5%.

The findings are the latest blow to Cigna’s Medicare business. Cigna in September disclosed that, due to ongoing Medicare sanctions, it would remain unable to sign up new beneficiaries through this fall’s open-enrollment period for the federal program.

Anthem Inc.’s (Indianapolis IN) deal to acquire Cigna is also facing a Justice Department antitrust challenge, as well as internal tensions that have led both companies to accuse one another of breaching terms of their merger, according to legal filings.

Aetna, meanwhile, said it had increased its percentage of Medicare members enrolled in 4-star plans or higher to 91%, up 4 percentage points from a year ago. It said it has the highest percentage of Medicare members enrolled in 4-star plans among publicly traded companies with over 250,000 Medicare Advantage enrollees. Nevertheless, Aetna’s shares fell 3%.

Steve’s Take: So what’s all this brouhaha about the Medicare Star-quality plan ratings? Actually I hadn’t heard much about the system in recent news coverage, other than it was started in 2007 as a way for CMS and Medicare beneficiaries to assess and compare Medicare Advantage health plans. The measures (pdf) target a broad array of clinical quality, customer satisfaction, regulatory compliance, and other beneficiary experience areas.

But now, with provisions of the Affordable Care Act dictating payment incentives for better overall performance, there is a financial reward for improving quality performance. Savvy investors saw the precipitous drop in these ratings for Humana and Cigna and headed for the hills.

Steve's Take: #Obamacare increases importance of #Medicare ratings, thus the flight of investors Click To Tweet

What makes Humana and Cigna stand out, however, is that overall, more Medicare Advantage programs received top quality ratings from the CMS for their 2017 plans than in previous years, reports Modern Healthcare. The agency reported that nearly 70% of Medicare Advantage enrollees would be in plans that received at least four stars. However, the average star rating declined slightly, according to data released Wednesday.

Attaining four stars has clear marketing advantages, but the CMS has tied financial incentives to the rating system as well. Plans that earn at least four stars receive a 5% boost to their monthly per-member payments from Medicare, while those with lower scores receive nothing extra.

The star ratings for the first time incorporated socio-economic information about plan enrollees. The change was announced after pressure from health plans and the release of studies showing patients eligible for both Medicaid and Medicare scored consistently worse than other enrollees on performance measures.

A total of 208 Medicare Advantage plans with prescription drug coverage for 2017 scored four stars or higher, according to Modern Healthcare. They have a combined enrollment of about 68% of all enrollees. That is up from 179 plans in 2016 and 158 plans in 2015. The average star rating for all 364 contracts was four.

Enrollment in Medicare Advantage plans next year is expected to be at an all-time high of about 18 million, which is about one-third of all Medicare enrollees, according to the CMS.

As pointed out earlier in this piece, the CMS levied sanctions against Cigna last year which banned the company from marketing and selling its Medicare Advantage policies to new beneficiaries. The CMS said Cigna plans “posed serious threats to the health and safety of Medicare beneficiaries.” For example, Cigna inappropriately denied medical care and prescription drugs to its members.

All of which still pales in comparison with the stakes involved in the government’s efforts to block both merger deals.

At the moment, I don’t hear anyone on Wall Street saying one deal or the other is a slam dunk to go through. But when I think way back to my law-school antitrust course, it’s hard to see how the reduction in the five biggest US health insurers down to just three, truly gigantic players won’t lessen competition. In my humble opinion, to argue otherwise requires the use of “magical thinking.” I mean, is there any question about this?

Certainly, steps can be taken to decrease the amount by which, at least on paper, competition for customers has shrunk. But selling off bundles of customers as a condition of a merger’s approval can be reversed rather quickly by re-acquiring them post merger. Just ask any marketing department head in the four companies. Well, perhaps let’s not put them on the spot at this crucial juncture in the litigation process.