The Centers for Medicare and Medicaid Services (CMS), a division of the U.S. Department of Health and Human Services, has decided to raise 2020 Medicare Advantage reimbursement rate by 2.53%. In February, CMS had proposed a hike of 1.59% but the rate hike is higher than expected.

Medicare Advantage (MA) plans were initiated by the government some years ago to control the rising cost of Medicare, a government program for retirees, and were administered by private insurance companies. The health insurers often add extra benefits to make these plans more appealing to consumers, thus justifying its name — Medicare Advantage. The government reimburses a certain amount per enrolee to health insurers in return of the care provided.

Why is Government Pitching for High Reimbursement Rates?

The higher-than-proposed increase in reimbursement rate for 2020 is meant to attract private health insurers with the aim of increasing managed care participation. This move will alleviate government healthcare, which is reeling under high Medicare costs.

According to CBO, total Medicare spending is expected to grow 7% per year after 2018 to about $1.2 trillion by 2028.  Medicare spending is anticipated to rise more rapidly relative to GDP owing to a number of factors, including a large aging population and faster growth in health care costs compared with growth in the economy on a per capita basis. In an effort to decrease the burden of rising healthcare costs, the government intends to rope in health insurers that are effective in managing costs.

In fact, the government has actually witnessed cost reduction by delegating Medicare to private players and is encouraging customers to opt for Medicare Advantage. The recent higher-than-expected rate highlights the government’s efforts to stabilize these plans and provide enough resources to insurance companies to support beneficiaries enrolled in private Medicare plans.

Cash Cow for Health Insurers

Meanwhile, these plans have been highly profitable for health insurers. Since MA members have higher medical utilization rates, they bring in about three times more revenues than commercial members. This trend has aided top-line growth of the companies engaged in MA. Further, health insurers have been able to maintain profitability in these plans by keeping claim cost down via measures such as preventive healthcare and accountable care organizations. This business has proven to be a boon for the health insurance industry.

In a year’s time, the industry has gained 13.8% compared with the Zacks S&P 500 composite growth of 12.2%.

Bottom Line

Given that MA is one of the few areas that has bipartisan support, its future appears bright. Industry analysts believe that the recent increase in reimbursement rates will lead to strong enrollment growth in this business in the next five years.

Some companies such as UnitedHealth Group Inc. UNH, Humana Inc. HUM, WellCare Health Plans Inc. WCG and Anthem Inc.ANTM with large exposure to MA business are set to gain.

Currently, Anthemsportsa Zacks Rank #1 (Strong Buy) and Wellcare holds a Zacks Rank #2 (Buy). UnitedHealth and Humana carry a Zacks Rank #3 (Hold) each. You can see the complete list of today’s Zacks #1 Rank stocks here.

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