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Health Insurers Bask Under Rising Insured, Medicare Business

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Despite industry disruptions, health insurers have managed to keep on their feet over the past year of disruptions. Rising enrollment and top-line growth, development of ancillary business, product modifications, improved service, demographic changes, expansion of international operations, better claims handling, growth of new business units, mergers and acquisitions and a strong capital position have better armed insurers to fight industry woes and emerge as winners.

The same is evident from a strong stock market performance by the industry, as seen by the 54% gain in a year’s time compared with the S&P 500’s gain of 24%.

Let’s take a look at how insurers fared recently.

Decline in Uninsured Rates

Over the past six years, the nation’s uninsured rate has gone down, thanks to the Affordable Care Act (ACA) mandates. According to a recent report from Gallup, the percentage of U.S. adults without health insurance was 12.2% in the fourth quarter of 2017.

It remains well below its peak of 18.0% measured in the third quarter of 2013, prior to the implementation of the ACA's healthcare exchanges and the requirement that most adults have health insurance or be subject to a fine, commonly known as the individual mandate.

Health insurers have capitalized on this surge in insured rates by raking in members, who added to their top-line growth. Most of the insurers have reported a secular rise in enrollment and revenues since 2010, confirming the fact.

Medicare Advantage, a Cash Cow

Medicare Advantage (MA) plans, which were introduced by the government some years ago to rein in rising costs of Medicare, the main government program for retirees, are administered by private insurance companies. The plan is rightly called Medicare Advantage, because of the extra frills provided in it by health insurers to make it more appealing (compared to the traditional Medicare) to customers.

Health insurers are reimbursed a certain amount per enrollee from the government in return for the care provided by the insurer. This reimbursement has been quite attractive, and insurers -- via their measures such as preventive healthcare and accountable care organizations -- have been able to maintain profitability in these plans. This business has proven to be a cash cow for the insurance industry.

Players’ attractiveness for MA business is increasing, fueled by demographic changes. With more baby boomers reaching retirement age, the number of people eligible for Medicare is projected to surpass 70 million individuals by 2024, up from 60 million at present, with gross spending for Medicare expected to reach $1.2 trillion by 2024, up from $770 billion projected for 2018.

Medicare Advantage continues to be a popular choice for approximately one-third of those enrolled in Medicare. Players have ample scope of growth as the Medicare Advantage market continues to expand and evolve. 

While two public providers, UnitedHealth Group Inc. (UNH - Free Report) and Humana Inc. (HUM - Free Report) , are the biggest players in this space, others are in the race to win Medicare Advantage market share. The fastest way of achieving this is by acquiring a company in the same business.

Players have been resorting to mergers and acquisitions, joint ventures and partnerships in an effort to deepen their reach in the Medicare market. Some of the biggest deals in this space were the acquisitions of HealthSpring by Cigna Corp. (CI - Free Report) , XLHealth Corp. by UnitedHealth Group, and Health Net by Centene Corp. (CNC - Free Report) . Recently, Anthem Inc. (ANTM - Free Report) announced to buy Florida-based Medicare Advantage insurer HealthSun and America’s 1st Choice, a privately held Medicare Advantage plan.

International Markets Hold Attraction

Excessive competition and pressure on profit margins in the U.S. market have compelled U.S. health insurers to look to foreign markets for business diversification, sustained growth and profitability. International markets appear attractive, as these are less penetrated and more competitive. Notably, Asia and Europe represent the best near-term opportunities for U.S. health insurers.

Cigna and UnitedHealth Group lead the private health insurance industry in terms of international deal activity. They’re followed by Aetna Inc. AET and Humana. The deals have either been mergers and acquisitions or joint ventures with local insurance companies.

Some of the deals made by players in this field echo the emerging trend of globalization.  Recently, Aetna acquired UK-based Bupa Group’s Thai business, Bupa Thailand, which will significantly increase Aetna’s presence in Asia. Earlier, it bought U.K.-based InterGlobal, which offers private medical insurance to groups and individuals in the Middle East, Asia, Africa and Europe.

Another insurer, Cigna, penetrated the market in India through a joint venture with TTK Group.

UnitedHealth’s purchase of a stake in AmilParticipacoes of Brazil and its recent announcement of buying Chilean company BanMedica points at the increasing trend of insurers going international.

Shift to Value-Based Care

The industry is witnessing a change from volume-based care to value-based care in recent years which has led to the emergence of Accountable Care Organizations (ACOs). These are formed when a group of health care providers (physicians, hospitals, non-physician providers, and the like) collectively take responsibility for the financial and quality outcome for a defined population.

The ACOs are appealing to insurers as these reduce medical cost and improve outcome. Insurers form an essential part of ACOs because these track and collect patient data, enabling an evaluation of patient care.

Since clinical information and care processes are shared and supported by all providers, it becomes easier to manage care and effectively lower the cost. With Obamacare, health insurers have to be more than just claims payers.

Under health care reform, insurers have lost flexibility in ways that they can cope with rising medical expenses. They can no longer rely on many of their traditional medical underwriting strategies, such as the exclusion of pre-existing conditions.

The most effective approach for insurers now is to rely exclusively on the current cost-control mechanisms to manage members’ medical expenses. Private commercial payers, such as Cigna, Anthem and Aetna are thus supporting ACO formation. CIGNA and UnitedHealth have one of the most established track records in the group for ACOs.

This ACO wave is expected to continue as players scramble to protect their margins in a very competitive market place, which offers limited scope for top-line growth. 

Developing Ancillary Businesses

Insurers are eyeing growth and expansion opportunities that accompany the critical challenges of modernizing the health care system. They are branching out to the non-traditional areas.

Over the last few years, several large insurers have acquired companies that fall outside the realm of traditional health insurance yet complement it.

Humana, Aetna and UnitedHealth have all been enthusiastically developing their health services businesses. These players have made several acquisitions both big and small to achieve fast-paced growth in this space. UnitedHealth’s Optum, for example, is a poster child of the growth of health services business that provides tremendous business diversification.

Players have well understood that sustainability over the long run would be possible only by branching out to a new business to relieve pressure on traditional health insurance, which is already saddled with huge competition. Areas such as data and analytics, pharmacy care services, ambulatory services and nursing services are on the radar of health insurers to expand.

Healthy Balance Sheet

Despite incurring heavy expenditures, most of the players in the industry boast solid capital levels. This reflects their profitable operations which have outpaced expense rise, leading to balance sheet growth.

Armed with enough capital, most of the players have resorted to share buyback to aid earnings in an environment when top-line growth is a challenge. Strong cash reserves have also enabled players to make acquisitions and mergers to achieve growth, along with positioning them well to face industry issues.

Zacks Industry Rank Indicates Solid Upside Potential

This 13-company group currently carries a Zacks Industry Rank of #23, which places it in the top 10% of the 250-plus Zacks classified industries. Our back-testing shows that the top 50% of Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Stocks Worth Adding

Investors can consider the following HMO stocks that have solid fundamentals along with a favorable Zacks Rank.

Centene provides multi-line managed care programs and related services to individuals receiving benefits under Medicaid, including Supplemental Security Income (SSI) and the State Children's Health Insurance Program (SCHIP).

It beat estimates in each of the last four quarters with an average positive surprise of 10.6%. Also, the stock has seen the Zacks Consensus Estimate for 2018 being revised upward over the past 60 days.

Centene carries a Zacks Rank #1 and sports a Value Score of A. You can see the complete list of today’s Zacks #1 Rank (Strong Buy)stocks here.

Magellan Health, Inc. (MGLN - Free Report) is a for-profit managed health care company, focused on behavioral healthcare.

It has a Zacks Rank #1 and a Value Score of A. The stock beat estimates in three of the last four quarters with an average positive surprise of 0.9%.

Also, the stock has seen the Zacks Consensus Estimate for 2018 being revised upward over the past 60 days.

Molina Healthcare Inc. (MOH - Free Report) , a multi-state health care organization, arranges for the delivery of health care services and solutions to individuals and families through Medicaid, Medicare and other government-funded programs.

It has a Zacks Rank #1 and a Value Score of A. The stock beat estimates in two of the last four quarters with an average positive surprise of 108%.

Also, the stock has seen the Zacks Consensus Estimate for 2018 being revised upward over the past 60 days.

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