How Medicare Advantage investors made billions off loose government lips

Introduction

The third of February 2011 was mostly a ho-hum day on Wall Street­ — but not for companies offering Medicare Advantage plans. Several of those firms hit the jackpot, tacking on billions of dollars in new value after federal officials signaled they might go easy on health plans suspected of overcharging the government.

The stocks took off after the federal Centers for Medicare and Medicaid Services advised the health plans in a memo that it was rethinking a move to ratchet up audits of the privately run Medicare plans. Some of these plans are run by publicly traded insurance companies whose fortunes can rise and fall significantly upon news of a change in Medicare policy.

At the time, health insurers were dreading the prospect of tougher audits, fearing they could wind up owing the government millions of dollars as a result.

A CMS spokesman said the two-paragraph memo was routine and that officials did nothing wrong in sending it out. But the advisory appears to contradict CMS regulations that urge officials to wait until after markets close to disclose information that could move stocks. The episode also raises fresh questions about the security and timing of “market-sensitive” disclosures – and just who gains access to the information.

“When the memo was released by people at the agency, they had to be ‘brain dead’ if they thought it would not quickly make its way into the hands of those who influence stock prices,” said Lynn E. Turner, a former Securities and Exchange Commission official and expert on financial reporting requirements.

Big Jump

CMS said it began sending out the memo on an internal message system at 9:30 a.m. on Feb. 3 and it took “several hours” to reach all of the 6,500 health plan recipients.

By mid-afternoon, a CMS official in Washington noted that shares in three major Medicare Advantage insurers had “shot up” as a result. 

Zoom

“There’s also an incredible volume – an atypical number of buyers and sellers,” CMS official Misha Segal wrote in an email to several agency higher-ups at 2:37 pm.

UnitedHealth Group, the nation’s biggest Medicare Advantage company, rose four percent, which “is nearly $2 billion in ‘newly created equity’ for the company,” according to Segal.

“This is a big jump,” he wrote.

The billion-dollar rally — and the role CMS played in sparking it — is disclosed in agency emails and other records obtained by the Center for Public Integrity through a Freedom of Information Act lawsuit.

CMS officials, in a statement, said nothing was amiss.

The memo “was routine, appropriate and did not contain sensitive information. This standard memo was simply a reminder that CMS would thoroughly evaluate all the comments received and that we anticipated potential future changes based on the input we received. No non-public information was provided in this message.”

Yet even the suggestion of an upcoming Medicare policy shift can trigger a stampede of buying or selling of health care stocks — and raise questions about how closely agency officials followed CMS regulations written to prevent this sort of Wall Street windfall.

The rules say officials should “strive to err on the side of caution” by waiting until after markets close at 4 p.m. Eastern Time to make announcements “because it is sometimes difficult” to predict what will roil stock prices.

The wait is to “allow the investment community broad access to the information and time to fully analyze the announced change before reacting to it,” according to a September 2010 CMS policy statement. CMS also regularly cautions employees to keep “market sensitive” deliberations under wraps.

Signaling changes

But the February 2011 memo from Cheri Rice, acting director of the Medicare Plan Payment Group, stated that CMS “anticipates making changes” to the much-feared audit process. The memo arrived at a time when the industry — and stock market analysts — were worried that the audits could seriously impact the bottom line.

Indeed, the memo brought a strong reaction. Justin Lake, then an analyst at UBS Investment Bank, flagged the memo as “breaking news from CMS” in a research note sent via email at 1:33 pm.

“We have been reading CMS notices for 10 years now and don’t EVER remember the agency indicating explicitly that there were changes coming in between publishing preliminary and final rules such as this. Very interesting indeed,” Lake wrote.

Lake speculated that it could signify a “kinder/gentler CMS” that would be less aggressive about clawing back widespread overpayments to Medicare Advantage plans. Such a stance would be “very bullish” for Medicare Advantage stocks, he said.

It’s not clear how the UBS analyst obtained the memo. Lake, who recently joined a hedge fund in Connecticut, declined comment through the firm.

At 2:07 p.m., a second CMS official remarked that Lake’s analysis “is generating huge amounts of interest from the markets. Bank of America just called me too,” he wrote.

In his 2:37 pm email, Segal cited Lake’s note as the biggest driver of the market: “The sales team at UBS must have gotten on [the] phones and convinced a bunch of analysts and traders that this was a big deal,” Segal wrote.

Much of the other chatter within CMS as the stocks gained ground was redacted from the volley of emails released to the Center for Public Integrity.

Still, it’s clear that agency officials were caught off guard. Stock in Humana Inc., the country’s second biggest Medicare Advantage plan, rose by five percent, while HealthSpring, also a Medicare insurer, was up four percent — all on a day when the Standard & Poor’s 500 index was roughly flat, according to the CMS mid-afternoon analysis.

CMS spokesman Aaron Albright said the memo was a “standard communication” and suggested the markets had over-reacted. “We can’t control how people react to a memo like this,” he said.

While investors may have welcomed CMS easing up on Medicare Advantage audits, taxpayers, both then and now, have much less cause for applause.

The audits the industry was hoping to scale back assess the accuracy of a billing tool called a “risk score,” which is supposed to pay insurers higher rates for taking sicker people and less for those with few medical needs.

By 2011, CMS officials had been struggling for years to track overspending tied to inflated risk scores. A 2009 agency study found that some plans had exaggerated how sick patients were to boost their payments, for instance. And by the agency’s own account, “improper” payments to Medicare Advantage plans cost taxpayers billions of dollars annually, as the Center for Public Integrity first reported last year.

Despite growing losses from improper billing, CMS officials have repeatedly caved in to pressure from the industry to scale back the consequences of these audits, which are known as Risk Adjustment Data Validation — or RADV.