Potential Deal? Lieberman says ‘Not yet’

This week Senator Reid and 10 other Senators agreed on a compromise which substitutes the public option with a privately run insurance option that they are very careful not to call a ‘public option’. It’s not clear to me how different this new proposal really is. It would be administered by the same group that purchases insurance for Congress and the military. These plans are government controlled, yet administered by a private corporation.

But to think the power in this plan sits on the side of the MCOs is a fallacy.

To think that Congress won’t make sure the third-party administrator’s margin is capped is also a fallacy.

The jump in the MCO stocks, as one commentator wrote is “it’s a matter of hope over brains.”

Senator Lieberman on Sunday came out and said that the possibility of a public option must be eliminated from the bill, and the buy-in by those 55-64 must also be eliminated. He sees the buy-in as a step towards a single payor system.

I remain convinced that some way, some how, this gets passed. Could be with 60 votes, or with 51 votes, but some version gets passed. And unless I’m missing something huge, there is no possibility that this will be positive for MCO companies. Perhaps the stocks initially go up because something worse didn’t happen, but it looks to me that the peak profitability for these companies could be in 2009. Starting in 2010, government will dictate who they cover, what prices they can charge (through caps on profitability) and no later than 2013, the tourniquet gets pulled tighter. I think the reason these stocks are selling at 8-9x 2010 EPS is simply that they are probably trading at 12-15x 2013 EPS. If the government gets their way the stocks are trading for a 20x 2013 earnings.

I do expect that the first knee jerk reaction from the MCOs will be to sharply raise rates in 2010-2011, which would be incredibly stupid. Doing so will have another backlash from Congress, perhaps even before the mid-term elections.

If the expansion of Medicare is in the final bill, that will be a negative to all providers since Medicare pays worse than commercial insurance. There could be an argument that if an uninsured person is now covered by Medicare that it is a gain for providers. But once on Medicare, probably always on Medicare. The rates that I’ve seen discussed, however, are so high that those in the 55-64 age range may not find that alternative attractive, in which case it doesn’t matter.