By James Gutman - January 13, 2012

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Only in the alternate universe that is Wall Street would something like this make sense. Medicare Advantage insurer Universal American Corp. announced Jan. 11 a planned acquisition of APS Healthcare, Inc. that figures to help it substantially in competing for the coming huge contracts for Medicare-Medicaid dual eligibles as well as help boost its CMS star ratings. The purchase price of $227.5 million was a little bit on the high side but not out of range given recent transactions. However, on the day the deal was unveiled, Universal American's stock price plummeted $2.61 a share or nearly 20%!

Why did the share price take such a hit? There seems to be general agreement on the cause. Wall Street had built up expectations before the APS deal was unveiled that Universal American itself was a candidate to be acquired. And as securities analyst Scott Fidel of Deutsche Bank said in a Jan. 11 research note, "We expect that the APS acquisition will require investors to reassess whether UAM [i.e., Universal American] should be considered an imminent takeout candidate given that the company is now pursuing a meaningful acquisition itself." It seems investors did indeed "reassess" and found that, as analyst Carl McDonald of Citigroup Global Markets wrote, "There's no question the APS deal complicates a potential Universal acquisition." And that in turn apparently meant selling the stock even though the deal stands to improve Universal American's earnings starting as soon as this year.

What are the consequences of such actions on decision making by MA plan sponsors, especially publicly owned ones? If short-term stock prices are important for such purposes as employee compensation and raising capital, will this deter other MA sponsors that are rumored acquisition targets (e.g., Health Net, Inc. and WellCare Health Plans, Inc.) from spending large sums to improve their long-term outlook? Is it true that "no good deed goes unpunished," as far as Wall Street is concerned?