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Health Care Stocks Face Medicare Advantage Hit

Obama, if elected, plans to cut spending on the program. Companies like UnitedHealth and Humana will have to prepare.

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Sen. Barack Obama (D. Ill.), with just a few words in

Wednesday night's presidential debate

, reconfirmed what he'd said in the second debate: If he is elected president, he will terminate subsidies for Medicare Advantage.

Replying to a question about potential cutbacks, the Democratic candidate said: "We spend $15 billion a year on subsidies to insurance companies ... under the Medicare plan. It doesn't help seniors get any better. It's not improving our health care system. It's just a giveaway."

This is not entirely a surprise, as it is well-known that this subsidy for Medicare Advantage is considered by the Democratic party to be an unnecessary expense burden on the American public; however, in today's economic climate and with pressure to reduce spending, it appears to be a priority item for Obama's potential administration. Could this be the end of Medicare Advantage?

Pressure on insurance companies has already started. In July, the Senate voted to approve the

Medicare bill

that reversed cuts in the reimbursements to physicians. The Democrats, in order to "pay" for this, introduced a measure to cut the level of payments to Medicare Advantage plans.

Permanent cuts to Medicare Advantage reimbursement are now officially the position that Obama has adopted and apparently he will not support a rate higher than that paid under Medicare. Emails to the campaign asking for clarification were not responded to by the time of this column's publication.

At the time the Medicare Act was voted through, Bill Novelli, CEO of the American Association of Retired Persons, praised the Senate, saying the "AARP applauds the bipartisan majority of senators who voted to pass a bill that would protect and improve Medicare for the 44 million Americans who depend on it."

However, Karen Ignagni, president and CEO of the health insurers body Americas Health Insurance Plans (AHIP) offered a different perspective when the bill passed back in July. She said, "As seniors learn the details of this hastily passed legislation, they will be shocked to learn they could face fewer choices, reduced benefits and higher out-of-pocket costs if these cuts become law." The Republican party is firmly on AHIP's side, although a call to Sen. John McCain's (R., Ariz.) campaign, seeking comment, was not returned.

If Obama is elected, it is reasonable to expect that in 2010 the private insurers offering Medicare Advantage plans would see a permanent reduction in reimbursement rates. It is not known to what extent the reduction would be, but AHIP does not support cuts and cautioned previously that there will be negative effects on the elderly.

Democrats said in July that this is nonsense and that as Medicare Advantage currently receives an excessive level of reimbursement for their services, reportedly up to 17% above Medicare rates, they would not be losing anything, just reducing their profits on the plans.

UnitedHeath Group

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(UNH) - Get UnitedHealth Group Incorporated Report

, earlier in the year announced that it was stopping marketing some Medicare Advantage special needs plans that it had been operating because of reduced earnings.


on Thursday reported a $920 million profit for the third quarter, down 28%. A change in the administration will put additional pressure on the company. It will be interesting to see the quarterly results for the Medicare Advantage giant


(HUM) - Get Humana Inc. (HUM) Report

, which is due to report Nov. 3, the eve of the presidential election.

Some of the cuts in reimbursements under Medicare Advantage already affect the teaching hospitals that were receiving expenses as well as the insurers when providing clinic care where double cost was eliminated. It would be reasonable to expect that if elected president, Obama would not reinstate these payments.

The high cost private fee-for-service (PFFS) plans operated by the insurers that are now required to establish a provider network unless exempted because of insufficient network plans will almost certainly decide that this is not a business to stay in.

Overall, these changes in Medicare Advantage would be expected to reduce the rapid growth of the plans and the enrollment in PFFS because of the reduction in profits available. Medicare Advantage-only providers may well withdraw from the market, meaning that under an Obama presidency it is likely that there will be a resurgence of Medigap policies. Ratings issues financial strength ratings for 4,000 life, health, annuity, and property/casualty insurers are available at no charge on the

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. In addition, the Financial Strength Ratings on each of the nation's 8,600 banks and savings and loans are available on the

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Gavin Magor joined Ratings in 2008, and is the senior analyst responsible for assigning financial strength ratings to health insurers and supporting other health care-related consumer products, including Medicare supplement insurance, long-term care insurance and elder care information. He conducts industry analysis in these areas. He has more than 20 years' international experience in credit risk management, commercial lending and analysis, working in the U.K., Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.