Why a pay cut to doctors is affecting health care stocks.
UnitedHealth (NYSE: UNH, Stock Forum) shares recently collapsed even as the company assured shareholders that it would meet its earnings expectations.
What's with the HMO stocks of late? Coventry Health Care (NYSE: CVH, Stock Forum) warned about its upcoming earnings, and the rest of the sector fell apart as well, despite assurances by some that they would not suffer the same fate.
It turns out that there is a nice bit of shuffling going on in Congress. On July 1, there is an automatic, across the board, 10.6% cut in pay to physicians from Medicare that's supposed to take effect. Congress has yet, as of June 24, to pass legislation to repeal the pay cut.
Thus, it is possible that after July 1, physicians will have to deal with a significant pay cut from Medicare, even as the aging population and the severity and frequency of illnesses is on the rise.
But, that's not the issue here. At least not right now. The issue is why would a 10% pay cut to doctors do anything to the HMO stocks?
The answer is that Congress looks set to take the money away from the HMOs, via a reduction in the Medicare Advantage program, the program that allows Medicare patients to use government dollars to pay for health care outside of Medicare.
According to The Wall Street Journal: "If Congress does nothing before July 1, doctors in Medicare will take a 10.6% cut in their pay. To stop that from happening Congress will likely raid Medicare Advantage and use the money saved by cutting that program to cushion the blow to doctors. What terrifies members is facing constituents over the July 4 break who will be upset about rising co-pays and uncertainty about their coverage. The question is how big of a bite the House and Senate will take out of Medicare Advantage. But cut they will, because Medicare Advantage plans enable competition that serves as a model for shaping Medicare into a privately run system."
And that's why the HMO stocks are all tanking, as a nice chunk of revenue is about to be reduced just as job losses in the private sector are starting to mount, which means that the revenue stream that comes from premiums is about to be shaved significantly from two sources, while at the same time, the markets, the other big source of income for insurers, is not likely to be much help for some time.
