The health insurance industry more popularly called Health Maintenance Organization (HMO) is in a sweet spot with full backing from the government to the Affordable Care Act. This reform instituted by Barack Obama back in March 2010, has been one of the major growth drivers for the industry, despite bringing in some constraints. Other factors such as aging U.S population, mergers and acquisition, investments in technology et al are expected to drive growth for the HMO players. Companies with the likes of UnitedHealth Group Inc. (UNH Quick QuoteUNH - Free Report) , Anthem Inc. , Humana Inc. (HUM Quick QuoteHUM - Free Report) and Centene Corp. (CNC Quick QuoteCNC - Free Report) stand to gain maximum, given their diversified business, vast scale, size, a wide bouquet of products and services, and a strong balance sheet.

About the Industry

The Health Maintenance Organization (HMO) industry comprises entities (either private or public) that take care of the basic and supplemental health services of its subscribers. Companies in this space primarily assume the risks involved and assign premiums to health and medical insurance policies. Industry participants also provide administrative and managed-care services for self-funded insurance. Services are generally provided by a network of approved care providers (called in-network), which include primary care physicians, clinical facilities, hospitals and specialists. However, out-of-network exceptions are made during emergencies or when it is medically necessary. Health insurance plans can be availed of by ways like private purchase, social insurance or social welfare programs.

Factors Shaping the Future of HMO Industry

Biden’s Support of ACA: President Joe Biden’s backing of the ACA is one of the most important positives for the industry. The government’s support for the ACA is aimed at bringing more Americans under the health insurance coverage. This will directly buoy the health insurers’ top line.

Soon after assuming office  Biden allowed a Special Open Enrollment window on Feb 15 and extended the same to Aug 15. This gave Americans another chance to buy insurance coverage online on health exchanges. The president also rolled out subsidies to make insurance more affordable.

Health insurers with the likes of Centene and MolinaHealthcare already reported growth in membership during the special enrollment period, which in turn, also prompted them to raise their membership guidance for 2021. This should further bolster their top lines. Per insurers, the current year might be the best selling year for them. Insurers like UnitedHealth Group Inc. (UNH Quick QuoteUNH - Free Report) and Cigna Corp. (CI) are expanding their presence on the exchanges by entering into new states.

Biden’s other healthcare-related ideas, such as lowering the Medicare eligibility age to 60 from 65 and making the presently-on-offer subsidies permanent will expand the health coverage net. With greater number of people getting insured, higher will be the business wins for health insurers, which indicate a long-term boon for the industry.

Growing Senior Population: As life expectancy continues to rise in the United States and seniors account for a higher percentage of the total population, overall demand for health insurance among the aged will soar. Medicare Advantage (MA) is the private version of the government Medicare program. MA plans are attractive owing to the continued decrease in member premiums, new benefits and less attractive medigap options.

Medicare Advantage enrollment estimates by The Congressional Budget Office (CBO) predict a continued improvement over the next decade with the Medicare Advantage enrollment plan covering about 47% of the beneficiaries by 2029.

Increased Automation: The industry also joined the movement of digital revolution by embracing cutting-edge technology for operational use. It was slow on this transition but the coronavirus pandemic accelerated the process.
Use of chatbots and AI-based voice, assistants, augmented reality (AR), virtual reality (VR) and mixed reality (MR), mobile-based apps, robots, cloud computing, analytics among other technologies are expected to optimize healthcare delivery and workflow while minimizing unnecessary costs. This should lead to enhanced operational efficiency and better customer experience. Insurers who can bridge the physical-virtual chasm will be the frontrunners in the industry.

Industry player UnitedHealth leads the pack with a separate unit named OptumInsight, which offers software, data analytics and related services to health care providers. Recently, it bought Change Healthcare, a health technology firm to fortify its health information and technology business.

Zacks Industry Rank Indicates Bright Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates rosy prospects in the near term.
The Zacks Medical-HMO, which is a 15-stock group within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #121, which places it in the top 48% of 251 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 48% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate.
Before we present a few HMO stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and its valuation picture.

 

Industry Outperformed the Sector But Lags the S&P 500

The Zacks Medical-HMO industry has underperformed the Zacks S&P 500 composite but has fared better than its own sector over the past year.
We see that the stocks in this industry have collectively rallied 33.5% over the past year compared with the Zacks S&P 500 composite’s rise of 34.5%. Meanwhile, the Zacks Medical sector has lost 2.3%.

One-Year Price Performance

HMO Industry's Current Valuation

On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing HMO stocks, the industry is currently trading at 1.56X compared with the S&P 500’s 21.31X and the sector’s 23.02X.

Over the past five years, the industry has traded as high as 20.58X, as low as 12.48X and at a median of 16.34X.
 

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500

4 HMO Stocks to Keep Tabs on

Below we select four stocks, each of which carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

UnitedHealth's top line is bolstered by new deals, renewed agreements and an expansion of service offerings. Its numerous acquisitions augur well for its inorganic growth profile. Extension of the company’s health services segment provides significant diversification benefits.
UnitedHealth remains well poised to benefit from its strong government business, comprising both Medicaid and Medicare Advantage. A solid balance sheet and a consistent cash flow generation not only encourage investments in business but also add shareholder value.
The company delivered an earnings surprise of 12.5% in the trailing four quarters, on average. For the current year sales and earnings are expected to grow by 10.9% and 11%, respectively, per the Zacks Consensus Estimate.

 

Price and Consensus: UNH

Anthem Inc.’s prudent acquisitions and collaborations complement its inorganic growth story and help it boost Medicare Advantage growth. Its increasing top line, driven by the premium rate increase and higher membership, paves the way for long-term growth. Its solid guidance impresses.

It witnessed a rise in usage of its virtual care services, which in turn, poises Anthem well for long-term growth, courtesy of surging demand for telemedicine in behavioral health amid the COVID-19 pandemic. Nevertheless, its strong capital position enabled it to undertake shareholder-friendly moves via buybacks and dividend payments.

The company delivered an earnings surprise of 3.98% in the trailing four quarters, on average. For the current year sales and earnings are expected to grow by 13.5% and 14.1%, respectively, per the Zacks Consensus Estimate.

 

Price and Consensus: ANTM

Humana is well-poised for growth on the back of a strong Medicare business, which has been performing well for several quarters. Acquisitions and alliances also place it well for growth. Its 2021 guidance impresses too. Moreover, it has been deploying excess capital for the past many years on its balance sheet strength. Strong operating cash flows are an added advantage

The company delivered an earnings surprise of 4.16% in the trailing four quarters, on average. For the current year sales and earnings are expected to grow by 8.1% and 14.6%, respectively, per the Zacks Consensus Estimate.

Price and Consensus: HUM

Centene boasts an impressive inorganic growth strategy for expanding its markets and increasing Medicaid membership. Its medical membership has been rising over the last several quarters courtesy of contract wins and expansion. The leading insurer also entered into an agreement to buy Magellan Health that will enable it to establish a behavioral health platform.

The company delivered an earnings surprise of 5.23% in the trailing four quarters, on average.  For the current year sales and earnings are expected to grow by 12.75% and 2.6%, respectively, per the Zacks Consensus Estimate.

Price and Consensus: CNC