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Medicare Map Favors Aetna

Big players could gain at the expense of regional outfits like Sierra Health, CSFB says.

Geography could play an important role in the new Medicare game.

In recent months, managed care companies from across the nation have rushed to capitalize on a major expansion of the government insurance program for senior citizens. However, national carriers like






may have already secured the best places in line. Meanwhile, regional players like

Sierra Health Services


could find themselves stuck behind, competing for less-profitable segments of the new Medicare Part D drug-coverage business.

That's the suggestion offered Wednesday by Credit Suisse First Boston analyst Patrick Hojlo, who recently discovered that the new senior business appears to be worth more in certain parts of the country than in others. Hojlo reached his conclusion after looking beyond national estimates for Medicare premiums to more specific -- and often widely varying -- state-by-state data.

"There has been a lot of discussion over the past week about the recently announced Part D premium benchmarks, most of which contained a positive spin," wrote Hojlo, who has an overweight rating on the managed care sector overall. But "we have reached some conclusions that are, at the margin, less positive than the consensus conclusions gleaned from last week's headlines."

In a recent parade of announcements, managed care companies marched forward to celebrate fresh news about the affordability of Medicare prescription drug coverage. After reviewing competitive bids from private insurers, the Centers for Medicare and Medicaid Services (CMS) determined that monthly premiums for the new drug coverage should cost about $15 less for the government -- and another $5 less for seniors -- than originally anticipated. In turn, many have assumed that those cheaper health plans will prove attractive to a larger group of seniors than expected.

PacifiCare Health Systems


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, one of the country's largest Medicare players already, was among the first to come out and cheer.

"CMS has clearly managed a process that encourages private-sector creativity, competition and choice for the nation's seniors," declared CEO Howard Phanstiel. "We're excited about the opportunity to participate nationally in the Part D program and feel that PacifiCare has competitive product offerings in all regions."

But PacifiCare is better positioned than most. The company is set to be acquired by

UnitedHealth Group

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, a national giant with the kind of reach that may be needed to become a winner in the new Medicare game. Otherwise, Hojlo's analysis shows, the company could have found itself playing an underdog role as a smaller player on a particularly tough home field.

PacifiCare's stock rose 54 cents to $75.47 Wednesday. It has more than doubled over the past year due to looming Medicare opportunities and, more recently, the offer to join forces with UnitedHealth.

California Cheap

For now, anyway, PacifiCare continues to be a regional player with a strong presence in California.

After reviewing the recent Medicare bids, Hojlo identified that particular state -- along with five others -- as a possible source of disappointment. On average, he said, California companies submitted the lowest bids of all for participation in the new Medicare program. The difference between their bid and the highest average bid, submitted by Mississippi, was 36%. That difference dropped to just 28%, he said, when compared to the national average.

In fairness, Hojlo noted, California includes a huge senior population -- 10% of the country's total -- that offers market opportunities and economies of scale that could justify somewhat lower prices. Still, he indicated, the discounts reflected in the government data seem to be unjustifiably steep.

"You simply cannot entirely explain the low average bids in many states by their concentration of seniors and/or drug utilization patterns," Hojlo wrote. "Any way you look at it ... it appears to us that certain regions at the low end of the reimbursement spectrum are unlikely to be as profitable as some health plans had hoped."

Besides PacifiCare, at least two other regional companies --

Health Net



Molina Healthcare

(MOH) - Get Molina Healthcare, Inc. Report

-- face California exposure. But Hojlo ultimately believes that larger players there, including market leader WellPoint, could be spared.

"Given their size, the large national health plans should not be significantly impacted by aggressive bidding in a few markets," he wrote. "Furthermore, the large plans will probably outlast the smaller, less savvy competitors who are, in some instances, likely to bid themselves out of the Part D business."

Vegas Gamble

Hojlo specifically highlighted Sierra -- which caters to the Las Vegas crowd -- as a potentially vulnerable candidate.

He said that Nevada, home to Sierra's major market, came in with the second-lowest Medicare bids of all. Moreover, he said, the state lacks both the high senior population and the drug utilization rate that would make those bids make sense. Instead, he suggested, companies seemed to be looking at the state's high growth rate and its close proximity to California -- potentially the real area of interest -- when placing their aggressive bids.

Sierra shares slipped 38 cents to $67.57 Wednesday.

Due to a combination of factors, Hojlo actually identified Ohio as the most problematic Medicare market of all. Specifically, he said, Ohio features the nation's sixth-largest Medicare population and "very high" prescription drug use trends. Even so, he said, companies there still submitted bids that came in lower than the national average.

"Granted, (Ohio's) size suggests a market opportunity and economies of scale that might justify lower pricing," he wrote. "But the state's high drug utilization patterns would seem to more than trump this."

While national players tend to dominate that particular market, at least one regional company --


(HUM) - Get Humana Inc. Report

-- seems to face exposure there.

Finally, Hojlo pointed to the Arizona and Pennsylvania/West Virginia regions as possible areas of concern. He called Arizona -- with its exploding senior population -- "less problematic" than Nevada even though its own proximity to California seemed to drive its bids lower as well. Elsewhere, he compared challenges in Pennsylvania and West Virginia to those that make Ohio especially troublesome.

Along with PacifiCare and some national companies, both Health Net and Humana rank as important players in Arizona. Meanwhile,

Coventry Health Care


stands out as one of the largest players in the Pennsylvania/West Virginia market.

"We still remain positive on the Medicare market opportunity for all of our outperform-rated companies (Aetna,



, PacifiCare, UnitedHealth,



and WellPoint)," he concluded. "We simply think that we are correct in maintaining relatively conservative Part D contribution assumptions in our 2006 projections ... and also correct in our belief that the major national health plans will be the Medicare winners in the long run."