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, such as the government-funded Medicare and Medicaid.
Let us take a look at the industry’s three major themes:
• Even though other industries in the healthcare space like hospitals took a hit from the pandemic-borne difficulties, health insurers remained profitable in the first half of 2020, driven by a decline in claims as hospital elective procedures were delayed to accommodate the COVID-19 infected patients. Per Moody’s Investors Service, publicly traded health insurers had a net income of $26 billion, up 87% year over year. However, medical costs are likely to shoot up in the second half 2020 as deferred procedures return, COVID-19 treatment costs continue and companies absorb the costs of assistance to customers and providers, according to Moody’s.
• The coronavirus outbreak triggered unemployment issues with millions of Americans losing their employer-sponsored health insurance coverage. But the unemployment rate remains above 10%, which is higher than the reading taken during the 2008-2009 recession. This bleak employment scenario will induce a loss in the Commercial business, which commands high-profit margins. However, this situation will cause a shift toward government-sponsored plans, such as Medicaid and Medicare. Thus players with a wide exposure to this business line will emerge as winners.
• As life expectancy continues to increase in the United States and seniors account for a higher percentage of the total population, overall demand for health insurance among the aged will increase. Going by the 2018 U.S. Census, between 2010 and 2030, the number of individuals in the 65 plus age bracket is projected to nearly double from 39 million to 73 million, marking a growth rate that is nearly 5 times faster than the 17% rise expected for the total populace. The census estimates this group to grow from 13% to 21% by 2030, reflecting it one of the fastest growing segments within the U.S. population.
This senior population fueled demand for Medicare Advantage (MA), the private version of the government Medicare program. Medicare Advantage continues to be a popular choice, serving 35% of individuals eligible for Medicare, up from 25% since 2010. These plans led to considerable revenue growth for the likes of UnitedHealth Group Inc. (UNH - Free Report) , Humana Inc. (HUM - Free Report) and Anthem Inc. (ANTM) among other health insurers. The overall Medicare market is forecast to expand from $860 billion annually in 2020 to $1.3 trillion in 2025. According to UnitedHealth, the market for Medicare Advantage could expand from a roughly 35% of all senior citizens today to more than 50% of the same by 2027.
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 upbeat 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 #31, which places it at the top 12% of 252 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 50% 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 S&P 500 and the Sector
The Zacks Medical-HMO industry has outperformed both the Zacks S&P 500 composite as well as its own sector over the past year.
We see that the stocks in this industry have collectively rallied 21.4% over the past year against the Zacks S&P 500 composite’s rise of 19.5%. Meanwhile, the Zacks Medical Sector has gained 8.8%.
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 15.47X compared with the S&P 500’s 23.05X and the sector’s 22.11X.
Over the past five years, the industry has traded as high as 20.58X, as low as 12.48X and at a median of 15.99X.
Price-to-Earnings (P/E) Ratio (F12M)
Price-to-Earnings (P/E) Ratio (F12M)
Players in the industry will continue to ride on technological investment and upgrade, application of blockchain technology, growth of new business units, international expansion, better claims handling, medical cost management, mergers and acquisitions, and a healthy balance sheet.
However, worsening of the high unemployment scene will escalate the uninsured levels, induce a loss in commercial health insurance and compress the top line of players with exposure to commercial health insurance. Nevertheless, gains from the Medicaid and Medicare plans will aid revenue growth for players with a large book of government business.
HMO Stocks to Consider
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Select Medical Holdings Corporation (SEM - Free Report) : Earnings of this currently Zacks Rank #1 stock surpassed estimates in the last reported quarter by 212.6%. It has an expected earnings growth rate of 10.48% for 2020.
Price and Consensus: SEM
Molina Healthcare Inc. (MOH - Free Report) : The bottom line of this company with a Zacks Rank #3 at present surpassed earnings estimates in three of last four quarters (missing the mark in one) by 2.28%. It has an expected earnings growth rate of 2.33% for 2020.
Price and Consensus: MOH
The Joint Corp. (JYNT - Free Report) : Earnings of this stock with a Zacks Rank #2, currently, surpassed earnings estimates in three of last four quarters (lagging the same in one) by 37.05%.
Price and Consensus: JYNT
Humana Inc. (HUM - Free Report) : This presently Zacks #2 Ranked stock’s bottomline surpassed earnings estimates in each of the trailing four quarters by 11.63%. It has an expected earnings growth rate of 4.98% for 2020.
Price and Consensus: HUM