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Zacks Industry Outlook Highlights: Amazon.com, Berkshire Hathaway and JP Morgan
Read MoreHide Full Article
For Immediate Release
Chicago, IL – May 21, 2018 – Today, Zacks Equity Research discusses Health Insurance, including Amazon.com, Inc. (AMZN - Free Report) , Berkshire Hathaway Inc. (BRK.B - Free Report) and JP Morgan (JPM - Free Report) .
While health insurers have managed to stand tall thesepast fewyears and the performance so far in 2018 has been commendable, some disruptive forces are underway in the industry that might alter the functioning of the organization and pose new challenges.
Let’s take a look at some of the current happenings that might shake the industry.
Will Foray of New Players Disrupt the Industry?
Amazon.com, Inc., Berkshire Hathaway Inc. and JP Morgan -- corporate czars in their respective fields--have teamed up to enter the healthcare market. While they have come together to manage healthcare cost for their employees, it would not come as a surprise if they start a healthcare company to provide services to the public at large.
Amazon has already expressed interest in the pharmacy business. A lot of progress is being made on this joint venture. At Berkshire Hathaway’s annual meeting, Buffett revealed that the joint venture will soon have a CEO to look after healthcare affairs.
There is no doubt that the entry of these retailers (especially Amazon, which has successfully turned the tide in its favor in whatever business it has laid its hands on thus far) will widely unsettle the healthcare sector.
These retailers, with their established brands, huge customer data, cutting-edge technology and superior product and services, should lead to a radical healthcare transformation. It is expected that the solutions created by them will to a large extent solve the three main challenges of the healthcare sector — access, quality and cost. A shift from “one-size-fits-all” care treatment to “tailor made care” should be in vogue, as these customer-centric companies try to design customer-specific products and services compared with traditional healthcare players that have hardly ever extended such care to customers.
Considering the health insurance industry, which was concentrated with a handful of big players that command product pricing and service offerings, and had an upper hand in dealing with customers, will find themselves in a radically changed scenario. Players in this space have already had to make fundamental changes in their business operations and attitude since the enactment of Obamacare in 2010 that put a check on malpractices to protect customers’ interest. Now, the entry of players that are already well established in their own fields and enjoy customer loyalty, will give the traditional healthcare players a jolt.
The need of the hour for healthcare entities is razor-sharp focus on innovation and service to protect their share in a market that they have ruled for ages. What’s more, they must do so to save their space from retail invasion.
What Does the Individual Mandate Repeal Mean for Insurers?
In December, Obamacare’s Individual Mandate, which required most Americans to be covered under a health insurance or to pay a fine, was stripped off, as part of the tax reform act. This provision will no longer be in effect from 2019. This policy change might lead to healthy individuals opting to remain uninsured only to buy an insurance cover when sick. This should lead to an adverse change in customer mix with insurers getting sick customers mostly, which might increase their risk pool and cause high claim incidence.
Insurers have been lobbying against this repeal fearing its unfavorable outcome. This might also destabilize the public exchanges where more sick customers would flock to buy insurance, causing an increase in insurance premium, or lead the insurance companies to exit from exchanges, if the business doesn’t look sustainable. Congressional Budget Office (CBO) has stated that repealing Obamacare’s individual mandate would cause 13 million fewer Americans to be insured in 2027. This implies an increase in the uninsured rate, which is inversely proportional to insurers’ earnings growth.
Tough Regulatory Oversight to Prevail
Mergers and consolidation are rife in the sector, triggered by the changing industry environment, which calls for the business to grow big in size in order to command the market and remain a leader. And the best way for insurers to achieve this status is to go for mergers and acquisitions.
However, this will not be easy to come by, given that regulators will not spare any chance to strip down a deal, which would go against the interest of consumers and throttle competition. Thus, the ride may not be easy for insurers on this front.
Margins to Stay Under Pressure
Minimum MLR rebate requirements limit the level of margin insurers’ can earn in their Commercial Insured, Medicare Insured and Medicaid Insured businesses while leaving them exposed to higher-than-expected medical costs. This has kept health insurers’ margins under pressure lately, a trend that will likely continue in the coming quarters. A host of factors —including compliance costs related to health care reform regulation, increased fees and taxes, pricing pressure, stiff competition and rising medical costs — are also in play in compressing margins.
The industry is also witnessing a general shift in patient mix from commercial insurance to government (Medicare, Medicaid and State-subsidized marketplace or exchange) which is another major dampener of insurers’ profitability. Premiums for Medicare, Medicaid and state-subsidized policies tend to be higher due to serious health issues for many enrollees. However, they carry smaller profitability margins compared to commercial insurance.
To Sum Up
Continued uncertainty will cast a shadow on the industry in the near term. Insurers will have to constantly take stock of their business workings to build a resilient enterprise. This will require an increased amount of investment and talent. Players can only emerge as winners when they act proactively.
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights: Amazon.com, Berkshire Hathaway and JP Morgan
For Immediate Release
Chicago, IL – May 21, 2018 – Today, Zacks Equity Research discusses Health Insurance, including Amazon.com, Inc. (AMZN - Free Report) , Berkshire Hathaway Inc. (BRK.B - Free Report) and JP Morgan (JPM - Free Report) .
Industry: Health Insurance, Part 3
Link: https://www.zacks.com/commentary/162932/will-entry-of-new-players-regulations-hurt-health-insurers
While health insurers have managed to stand tall thesepast fewyears and the performance so far in 2018 has been commendable, some disruptive forces are underway in the industry that might alter the functioning of the organization and pose new challenges.
Let’s take a look at some of the current happenings that might shake the industry.
Will Foray of New Players Disrupt the Industry?
Amazon.com, Inc., Berkshire Hathaway Inc. and JP Morgan -- corporate czars in their respective fields--have teamed up to enter the healthcare market. While they have come together to manage healthcare cost for their employees, it would not come as a surprise if they start a healthcare company to provide services to the public at large.
Amazon has already expressed interest in the pharmacy business. A lot of progress is being made on this joint venture. At Berkshire Hathaway’s annual meeting, Buffett revealed that the joint venture will soon have a CEO to look after healthcare affairs.
There is no doubt that the entry of these retailers (especially Amazon, which has successfully turned the tide in its favor in whatever business it has laid its hands on thus far) will widely unsettle the healthcare sector.
These retailers, with their established brands, huge customer data, cutting-edge technology and superior product and services, should lead to a radical healthcare transformation. It is expected that the solutions created by them will to a large extent solve the three main challenges of the healthcare sector — access, quality and cost. A shift from “one-size-fits-all” care treatment to “tailor made care” should be in vogue, as these customer-centric companies try to design customer-specific products and services compared with traditional healthcare players that have hardly ever extended such care to customers.
Considering the health insurance industry, which was concentrated with a handful of big players that command product pricing and service offerings, and had an upper hand in dealing with customers, will find themselves in a radically changed scenario. Players in this space have already had to make fundamental changes in their business operations and attitude since the enactment of Obamacare in 2010 that put a check on malpractices to protect customers’ interest. Now, the entry of players that are already well established in their own fields and enjoy customer loyalty, will give the traditional healthcare players a jolt.
The need of the hour for healthcare entities is razor-sharp focus on innovation and service to protect their share in a market that they have ruled for ages. What’s more, they must do so to save their space from retail invasion.
What Does the Individual Mandate Repeal Mean for Insurers?
In December, Obamacare’s Individual Mandate, which required most Americans to be covered under a health insurance or to pay a fine, was stripped off, as part of the tax reform act. This provision will no longer be in effect from 2019. This policy change might lead to healthy individuals opting to remain uninsured only to buy an insurance cover when sick. This should lead to an adverse change in customer mix with insurers getting sick customers mostly, which might increase their risk pool and cause high claim incidence.
Insurers have been lobbying against this repeal fearing its unfavorable outcome. This might also destabilize the public exchanges where more sick customers would flock to buy insurance, causing an increase in insurance premium, or lead the insurance companies to exit from exchanges, if the business doesn’t look sustainable. Congressional Budget Office (CBO) has stated that repealing Obamacare’s individual mandate would cause 13 million fewer Americans to be insured in 2027. This implies an increase in the uninsured rate, which is inversely proportional to insurers’ earnings growth.
Tough Regulatory Oversight to Prevail
Mergers and consolidation are rife in the sector, triggered by the changing industry environment, which calls for the business to grow big in size in order to command the market and remain a leader. And the best way for insurers to achieve this status is to go for mergers and acquisitions.
However, this will not be easy to come by, given that regulators will not spare any chance to strip down a deal, which would go against the interest of consumers and throttle competition. Thus, the ride may not be easy for insurers on this front.
Margins to Stay Under Pressure
Minimum MLR rebate requirements limit the level of margin insurers’ can earn in their Commercial Insured, Medicare Insured and Medicaid Insured businesses while leaving them exposed to higher-than-expected medical costs. This has kept health insurers’ margins under pressure lately, a trend that will likely continue in the coming quarters. A host of factors —including compliance costs related to health care reform regulation, increased fees and taxes, pricing pressure, stiff competition and rising medical costs — are also in play in compressing margins.
The industry is also witnessing a general shift in patient mix from commercial insurance to government (Medicare, Medicaid and State-subsidized marketplace or exchange) which is another major dampener of insurers’ profitability. Premiums for Medicare, Medicaid and state-subsidized policies tend to be higher due to serious health issues for many enrollees. However, they carry smaller profitability margins compared to commercial insurance.
To Sum Up
Continued uncertainty will cast a shadow on the industry in the near term. Insurers will have to constantly take stock of their business workings to build a resilient enterprise. This will require an increased amount of investment and talent. Players can only emerge as winners when they act proactively.
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.
Click here for the 6 trades >>
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.