Though the health insurance industry has always faced regulations, the Affordable Care Act (ACA, or Obamacare), enacted in 2010, was so heavy on regulatory oversight that it made health insurance almost synonymous with regulations. The reform, with its numerous provisions, took away working flexibility from insurers who were at ease before it was enacted.
The industry did eventually adjust to the new regulatory regime, but they likely have to go through that process all over again as the GOP comes through on its ‘repeal & replace’ mandate. The new law, called American Health Care Act, or AHCA, has been passed by the House of Representatives already and is currently in the Senate.
A lot is still up in the air at this stage, but the overall expectation is that the new regulatory framework will provide for a relatively lighter regulatory touch and will be friendlier to the industry. That said, the expected change would have some negative effects on the industry as well.
The year so far has been an eventful one for the industry, which saw two mega-mergers –Anthem Inc. (ANTM - Free Report) with Cigna Corp. (CI - Free Report) and Aetna Inc. (AET - Free Report) with Humana Inc. (HUM - Free Report) – being blocked by regulators on antitrust concerns. The industry has also been receiving jolts from executive orders and the initial bill drafted by President Trump’s aides in March.
Key AHCA Changes
The new proposed law (AHCA) is a major departure from the existing statute, with some of its provisions potentially net negatives for the industry.
- AHCA gets rid of the individual mandate that required everyone to have health insurance.
- The new law changes the way Medicaid gets funded – from an open-ended program to one with block grants or fixed amounts. Please note that Medicaid expansion was the primary avenue through which ACA expanded health coverage.
- Cutting down subsidies that were provided under the ACA to people enabling them to subsidized policies. The AHCA aim to replace these subsidies with tax credits, which is dependent on the age of the customer.
Changes to the way Medicaid get funded represent the biggest change that the proposed law makes in the country’s healthcare system. Changing Medicaid from an open-ended entitlement to a fixed annual amount could potentially force states to become creative in how they administer this system, though most non-partisan analysts expect the move to reduce the number of insured.
A report from PwC estimates that insurers likely would lose most of the $1.9 trillion in federal ACA-related subsidies slated to be doled out over the next 10 years. The Congressional Budget Office (CBO) estimates that 23 million people would lose health coverage by 2026.
Per the CBO, AHCA would cause 14 million more people to be uninsured in 2018. The number is expected to reach 19 million in 2020 and 23 million in 2026. In 2026, about 51 million people under the age of 65 would be uninsured compared with 28 million who would lack insurance that year under Obamacare. This is a potentially negative development for companies with Medicaid-centric businesses such as Molina Healthcare Inc. (MOH - Free Report) , Centene Corp. (CNC - Free Report) and WellCare Health Plans, Inc. (WCG - Free Report) .
While the AHCA has yet to reach its final shape, let’s look at the challenges facing the industry players, particularly with reference to ACA related issues.
Public Exchanges Woes
Public Exchanges made their debut in Oct 2013, and were considered one of the signature achievements of Obamacare, aimed at providing subsidized insurance to millions. The insurers were also sanguine about the exchanges, hoping to make big business out of them, but are struggling now.
These insurers are saddling high medical expenses of individuals who bought the subsidized policies under the health care law. The public exchanges attracted a disproportionate number of unhealthy individuals compared to healthy ones. A higher percentage of unhealthy patients led to higher claims for the insurers, thus leading to losses from the policies sold to these groups of people.
Big players like UnitedHealth Group Inc. (UNH - Free Report) and Aetna have significantly reduced their presence on these exchanges. Other players are also considering doing this, as well.
Margins Under Pressure
Health insurer margins have been under pressure lately, a trend that will likely continue til ACA-related issues get addressed. 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 -- have been exerting pressure on the bottom line.
A general shift in patient mix from commercial insurance to government (Medicare, Medicaid and State-subsidized marketplace or exchange) has also affected profitability to a large extent. 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.
High Regulatory Cost
Regulatory reform sweeping through the sector has hit insurers with high compliance costs. Expenditures involved in redoing the internal systems has led to increased expenses. There has been huge spending on health information technology (HIT) following the implementation of The American Recovery and Reinvestment Act of 2009, or Recovery Act, which contains the Health Information Technology for Economic and Clinical Health Act, or the HITECH Act. Notably, HIT includes electronic health records or EHRs, health information exchanges or HIEs and other initiatives.
The federal government's emphasis on the use of health IT, which helps providers communicate better with each other about patient care, reduces medical errors, paperwork and needless duplicate screenings and tests, leading to better coordinated patient care and lower health care costs. These have increased health care information technology spending. Financial incentives offered by regulators to providers and hospitals for the implementation of the meaningful use of health care IT products are primarily driving IT spending.
Global Economic Woes and Regulatory Challenges
A fragile global economy presents a headwind for insurers looking to expand their international operations. One of the largest insurers, UnitedHealth Group, made an acquisition to reap benefits from the Brazil market but is now facing slowing growth rates in that country.
In the case of India, which remains one of the most profitable opportunities for insurers, the regulatory environment is still somewhat challenging. China -- which merits the highest risk-adjusted opportunity ranking, largely because of its immense scale -- poses significant investment restrictions to foreign insurers entering and operating there.
HMO Stocks to Avoid for the Time Being
We presently recommend investors to stay away from the following HMO stocks, given their unfavorable Zacks Rank. The other metrics also indicate that they are not profitable investment options at present.
Select Medical Holdings Corp. (SEM - Free Report) through its subsidiaries, operates specialty hospitals and outpatient rehabilitation clinics. The company's Specialty Hospital segment offers long-term acute care hospital services and inpatient acute rehabilitative hospital care services. The stockcurrently has a Zacks Rank #4 (Sell) and missed earnings estimates in two of the last four reported quarters, with an average negative surprise of 11%.
The Joint Corp. (JYNT - Free Report) is a healthcare franchisor of chiropractic clinics. The company's plans include: Single Visit, Premium Wellness Plan and Wellness Plan. It also provides a family wellness plan. The Company also provides removal of subluxations. The stock currently has a Zacks Rank #4 (Sell) and missed earnings estimates in two of the last four reported quarters, with an average negative surprise of 10%.
Triple-S Management Corp. (GTS - Free Report) is an independent licensee of the Blue Cross Blue Shield Association. It is the largest managed care company in Puerto Rico, serving approximately one million members across all regions. The stock currently has a Zacks Rank #5 (Strong Sell). It missed earnings estimates in each of the last four reported quarters, with an average negative surprise of 142.2%.