The Affordable Care Act cuts payments to Medicare Advantage plans, which may cause some companies to get out of the business. Mitt Romney says 4 million seniors will lose their Advantage plans due to these cuts. I keep saying that insurance companies seem to know something the rest of us don’t – and so they keep investing in Medicare Advantage.

The latest example is Aetna offering to pay $7.3 billion for Coventry Health Care Inc. (NYSE:CVH).

LifeHealth Pro, an insurance industry publication reported today:

Aetna, Hartford, is starting with 18 million enrollees, 437,000 Medicare Advantage enrollees, 1.2 million Medicaid enrollees, and $36 billion in projected 2012 revenue.

Coventry, Bethesda, Md., has 4 million enrollees, 253,000 Medicare Advantage enrollees, 932,000 Medicaid enrollees, and $14 billion in projected 2012 revenue.

Aetna likes Coventry’s emphasis on efficient, low-cost plans with relatively narrow provider networks, Aetna says.

Earlier this year, Cigna completed its purchase of Healthspring for $3.8 billion.

In January 2012, the Philadelphia Business Journal reported:

Cigna has completed its previously announced $4 billion acquisition of HealthSpring, a move that expands its presence in the Medicare managed-care market.

The acquisition adds more than a million individuals to Cigna’s existing 70 million members.

HealthSpring of Nashville, Tenn., has 340,000 Medicare Advantage members in 11 states — including Pennsylvania and New Jersey — and Washington, D.C., as well as a large, national stand-alone Medicare prescription drug business with more than 800,000 customers.

In 2010, HealthSpring paid $545 million to buy Baltimore-based Bravo Health, the Philadelphia market leader in providing managed-care plans for residents dually eligible for Medicare and Medicaid.

So insurance companies keep investing billions of dollars to expand their Medicare Advantage business – while Mitt Romney says Obamacare is killing this option for seniors.   As I see it, smaller Advantage plan companies will find it difficult to find enough efficiencies to handle lower payments from Medicare. But the big players will get bigger, and they know they can still make profits with less money from Medicare.

Insurance companies like UnitedHealthcare, Cigna, Wellpoint, and Aetna seem to know that Medicare Advantage enrollment will continue to grow year by year (it’s almost 30% of all Medicare beneficiaries now). And they figure they can make profits from the billions of dollars in revenue they can get from Medicare.

FYI: In many urban areas like Phoenix and Tucson, AZ, almost 50% of Medicare beneficiaries are enrolled in Medicare Advantage. Other cities with high Medicare Advantage enrollment are: Philadelphia, Pittsburgh, Buffalo, Miami, Los Angeles.

Medicare Advantage plans will be paid less money by Medicare next year, and the year after that. The Affordable Care Act will limit Medicare Advantage administrative costs and profits to 15% of revenues (almost all it coming from Medicare). Democrats don’t like Medicare Advantage because it is seen as a movement to privatize Medicare by turning it over to insurance companies. Republicans have warned that Democrats want to kill Medicare Advantage and this will affect more than eleven million people who are enrolled in these plans around the country. Various studies have determined that Medicare Advantage is doomed to disappear due to funding reductions.

In Arizona, Medicare Advantage enrollment is very high. In Pima and Maricopa counties, 45% of Medicare beneficiaries are enrolled in Medicare Advantage. In Pinal County, the number is 49%.  People in Arizona should be worried about the future of Medicare Advantage.  Or should they?

Why are insurance companies investing in a business that is going out of business in a few years?

UnitedHealth Group Inc will acquire XLHealth Corp , “a company that specializes in plans for Medicare recipients with special needs, including chronic illness, and those low-income beneficiaries who also receive Medicaid government coverage”, according to a Reuters report.

According to Reuters:

XLHealth serves about 113,000 Medicare Advantage plan members in six U.S. states and is expanding into six more next year. It estimates its 2012 revenue will exceed $2 billion.

UnitedHealth is already one of the largest providers of Medicare Advantage plans, with 2.2 million members at the end of September. It expects total revenue to exceed $101 billion this year.

Medicare is an enticing market for U.S. health insurers, as the entry of the postwar baby boom generation into retirement looks to swell the ranks of privately run Medicare Advantage plans.

Such plans now account for 25 percent of Medicare enrollment, compared with 75 percent for government-run plans, but analysts expect that percentage to rise. Medicare beneficiaries can choose to receive their benefits through private health insurance plans.

Last month, Cigna Corp agreed to buy HealthSpring Inc for $3.8 billion as a way to expand its presence in the Medicare Advantage business.

Earlier this year, Wellpoint bought CareMore for nearly $ 800 million.

The largest insurance companies in the country seem to know something the rest of us don’t know.  And they seem pretty confident that Medicare Advantage will continue to be a profitable business in the future.