A surge in insurance stocks before the official government announcement on new Medicare rates is shining a spotlight on the ties among Congress, U.S. agencies and certain investment advisers.
At issue is a private e-mail from a politically connected research firm that alerted recipients that Medicare rates, scheduled to drop under a preliminary decision, would increase instead. The e-mail from Height Analytics LLC hit at 3:40 p.m. on April 1, followed by a sharp rise in the stocks of insurers such as Humana Inc. that participate in the Medicare program.
The trading surge prompted Senator Chuck Grassley to call for increased scrutiny of how market-moving information is shared in Washington. One of Height’s founders is Andrew Parmentier, a former staffer for the House Financial Services Committee and previously an aide to former House Majority Leader Dick Armey.
“Does the political intelligence industry have advance knowledge of internal agency decision-making?” Grassley, a Republican from Iowa, asked in a statement today. “Did that come from the agency, Congress, or the White House? And if so, that’s unfair to everyday investors.”
Grassley said this afternoon that he would investigate the Centers for Medicare and Medicaid Services to see whether the agency was the source of the leak. He sent a letter to the agency’s acting administrator, Marilyn Tavenner, demanding the timeline of the agency’s decision on the insurer rates.
Past investigations have found the agency had “loose procedures for dealing with outside firms,” Grassley said in the letter. It’s not clear yet whether the leak came from inside the agency, or might have come from Capitol Hill.
It’s also still not known whether Height had any specific information about the increase, or from where it might have originated if they did. In an e-mail response to questions, Parmentier wrote: “We are confident our April 1 report was based on good research, conducted in accordance with the laws, rules and regulations governing the securities industry.”
The Height note was first reported by the Wall Street Journal.
After the Height memo was sent out, about 4 million shares for Louisville, Kentucky-based Humana changed hands in the last 20 minutes of trading on April 1, according to data compiled by Bloomberg. That’s equivalent to $305 million in market value and compares with a daily average volume of 2.17 million shares over the past year.
The timing of the memo, as well as the plausibility that the government might reverse itself, is what caused the markets to swing the way they did, said Jeff Jonas, an analyst with Gabelli & Co. in New York who said he doesn’t subscribe to Height’s notes.
“We know this administration wanted to make health reform work and didn’t want to cause massive disruption in the market,” Jonas said in a telephone interview. “There was also a case of pretty unprecedented lobbying by the House and Senate. That’s why the impact was probably a lot greater than normal.”
Given the potential stock swings, firms like Height are growing in Washington, as is the whole industry of expert advice and intelligence, said Les Funtleyder, president of the investment advisory division at New York-based Poliwogg LLC
“Results like this tend to build credibility,” Funtleyder said in a telephone interview. “You make a call like this, and people start to pay attention. You make a couple of good calls, and if you can deliver a product that enables people to make money, people will flock to you.”
It may be hard for the government to stop the flow of information from Washington to Wall Street. The Government Accountability Office, a nonpartisan arm of government that serves as the investigative arm of Congress, released a report today on political intelligence firms that said it was difficult to find out exactly how deep the firms had penetrated.
“The prevalence of the sale of political intelligence is not known and therefore difficult to quantify,” the agency said in the report. “Even when a connection can be established between discrete pieces of government information and investment decisions, it is not always clear whether such information could be definitively categorized as material.”
There’s little question, though, that the information can offer an advantage, said Erik Gordon, a professor at the Ross School of Business at the University of Michigan in Ann Arbor.
“We have two standards here -- we have a standard for inside information coming from business corporations, and no standard for it coming from the federal government,” Gordon said. “The standard for the federal government should be higher, instead of non-existent.”
Next page: Height Memo
The Height memo outlined the firm’s belief “that a deal has been hatched to protect Medicare Advantage rates,” according to the copy received by Bloomberg News. The note suggested the deal may be aimed to “smooth the confirmation” of Tavenner, who President Barack Obama has chosen to head the CMS.
Tavenner is set to go before the Senate Finance Committee on April 9. The committee announced her confirmation hearing on April 2, a day after Medicare announced its rate decision.
The announcement by the CMS said a key rate used to determine payments insurers get for running the government’s Medicare Advantage plans would be boosted by 3.3 percent, instead of trimmed by 2.2 percent. The about-face by the Medicare agency came after insurers and Republican lawmakers complained that the Obama administration relied on faulty accounting assumptions in proposing the cut.
While Medicare typically releases information after the market closes to prevent such stock swings, Height’s e-mail beat the closely guarded announcement by about 40 minutes, according to the memo recipient.
Height describes itself as a “privately-held capital markets firm that provides research, advisory and investment banking services,” according to its website.
Humana gained about 1.8 percent on April 1 before jumping as much as 9.5 percent after 3:40 p.m. and closing up 8.6 percent before the announcement. Humana gets 66 percent of its revenue and 58 percent of profit from Medicare Advantage, leading the industry, according to estimates by Cowen & Co. analysts.