How Medicare Advantage Investors Profited From Loose Government Lips
On Wall Street, Feb. 3, 2011, was mostly a ho-hum day. But not for companies that sell Medicare Advantage plans.
Several of those that offer the privately run Medicare coverage option 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 plans in a memo that it was rethinking a move to ratchet up audits. Some of these plans are run by publicly traded insurance companies whose fortunes can rise and fall on a whiff of change in Medicare policy.
At the time, health insurers were bracing for tougher audits, fearing they could wind up owing the government millions of dollars as a result.
The memo was sent to Medicare Advantage plans, but wasn't available to the general public.
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 so-called 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.
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.
"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 p.m. (See the email traffic below.)
UnitedHealth Group, the nation's biggest Medicare Advantage company, rose 4 percent, which "is nearly $2 billion in 'newly created equity' for the company," according to Segal. "This is a big jump."
The huge stock 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. (See the policy statement below.)
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 hurt the companies' bottom lines.
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 p.m.
"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 p.m. 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 5 percent. HealthSpring, also a Medicare insurer, was up 4 percent. It all happened 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 overreacted. "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 that 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.
CMS posted a draft regulation on Dec. 20, 2010, that outlined how the audits would be conducted and asked for comments. In the Feb. 3 memo, CMS official Rice wrote: "We are thoroughly evaluating all comments and anticipate making changes to our draft, based on input we received."
The amount of money in dispute could be growing along with the Medicare Advantage program, whose annual cost now exceeds $150 billion.
More than four years after the February 2011 memo was sent, CMS still hasn't finished even the first round of the RADV audits. "These audits are underway. CMS is auditing 30 contracts and we do not have a specific timeframe for completion," agency official Albright said.
CMS has come under fire in recent years over how it releases policy information — and to whom. In Dec. 2011, Sen. Chuck Grassley, R-Iowa, criticized the agency for conducting briefings on behalf of hedge funds and so-called "political intelligence brokers" who seek to profit as a result. The SEC also has regulations on disclosure.
CMS also is at the center of an ongoing probe into whether 2013 Medicare Advantage rate information was leaked in advance of the public announcement.
This piece comes from the Center for Public Integrity, a nonpartisan, nonprofit investigative news organization. To follow CPI's investigations into Medicare and Medicare Advantage waste, fraud and abuse, go here. Or follow the organization on Twitter: @Publici.
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