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Sell Block: Say No to HMOs

Thursday, 10 Jul 2008 | 9:01 PM ET

Cramer last week offered up his prediction of potential winners from the new Medicare bill -- the one that passed in the Senate yesterday. (President Bush has said he'll veto -- but it already passed by a veto-proof margin.) The good news is that Fresenius Med, Cramer's fave of the bill, got bumped to a 52-week high today with three points. But what about the losers of the Medicare bill -- the new offenders headed for the Sell Block?



The bill is worth $12.5B and Cramer told you where that money was going -- but where is it coming from? Largely from a 2% cut to HMOs that sell Medicare Advantage plans -- and also doing away with double payments to teaching hospitals.

These HMOs get about 13% in government subsidy for each plan, so 2% may not sound like a big cut at first. The problem is what this bill and what this cut signifies: HMOs have lost the political protection of Republicans as the "Bolsheviks," as Cramer calls Democrats now in control of Congress -- and perhaps the White House in November.

So despite this week's advice from the Cramerican Marine Field Guide to Recession, Cramer advises you "stay the heck away" from Medicare managed HMOs. For example, Healthspring gets 88% of its earnings from Medicare Advantage plans -- send that one straight to Gitmo, says Cramer, because that percentage is way too high. Humana, another HMO, gets 80% from those plans -- they're getting "waterboarded" too. Coventry gets 32%, lock it up. Healthnetgets 28% -- busted. Triple-S gets 22% -- it's headed for solitary confinement with the rest. UnitedHealth gets only 12% from the plans, but it's going down too. "There's no Eight Amendment in Cramerica." Sorry guys.

These HMOs are what companies offer employees for health plans. So the fewer the employees, the fewer people there are paying their premiums. Unemployment hurts HMOs. Between 2000 and 2002, when unemployment grew monthly by double digits, overall levels of membership at managed care companies fell an average of 1.3% a year. And in the employment boom between 2004 and 2006, HMO membership levels increased an average of 3% per year. But "that party is definitely over," says Cramer.

Bottom line: the tide of both legislation and unemployment is now going against HMOs and they don't stand a chance -- something Jim's been foretelling for months. So it's time to put these "recidivists" in lockdown: Healthspring, Humana, Coventry, Healthnet, Triple-S, UNH. It's the Sell Block for the lot of them.

Mad Money Sell Block
Mad Money's Jim Cramer tells you which stocks you ought to be selling right now, either to take profits or to cut your losses.



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