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Near-Term Outlook for Health Maintenance Organization Industry

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As the name implies, 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 industry primarily assume the risks and assign premiums for health and medical insurance policies. Industry participants also provide administrative and managed care services for self-funded insurance.
 

Services are generally provided via their network of approved care providers (called in-network) which include primary care physicians, clinical facilities, hospitals and specialists. However, exceptions are made (medical care is provide from out-of- network) in emergencies or when medically necessary. Health insurance plans can be availed by ways such as private purchase, social insurance or social welfare programs such as Medicare and Medicaid, funded by the government.

Let us take a look at the industry’s three major themes:

•    The HMO industry is witnessing aggressive mergers and acquisitions as the players strive to gain market share and build forward and backward capabilities. While most common takeovers in recent years have been in the areas of Medicare and Medicaid, aimed at tapping the huge demand from the retiring baby boomer population, mergers between companies from different industries of the healthcare sector have also been rampant in 2018.

The approval to the twin mergers — Aetna Inc. AET with CVS Health Corp. (CVS - Free Report) and Cigna Corp. (CI - Free Report) with Express Scripts — will lead to the union of a health insurer and a pharmacy benefit manager. This points to the fact that players are trying to expand vertically, in an effort to control medical cost.

•    The industry has witnessed a decline in uninsured rates, courtesy the Affordable Care Act (ACA). Between 2010 and 2018, the uninsured rate dropped from 16% (48.6 million people) to 8.8% (28.3 million people), per the National Center for Health Statistics (NCHS). A decline in uninsured rate means increased health insurance enrollment. The primary driving factor for this change has been Medicaid Expansion, which came into effect in 2014.

•    The industry has also witnessed development in ancillary business in recent years to diversify revenue sources in the wake of tough regulations laid on the health insurance business. These businesses, mostly in the form of health care services, are growing rapidly, opening up new avenues of growth and forming an increased proportion of the industry’s total revenues.

HMOs give importance to health services business, which enables them to play a role as comprehensive health care providers and have made huge investments in expansion. Thus, growth in health services business should continue, offering resilience to the industry’s top line.

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 bright prospects in the near term. The Zacks Medical-HMO, which is an 11-stock group within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #38, which places it at the top 15% of 257 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 positive earnings outlook for the constituent companies in aggregate. In a year’s time, the industry’s earnings estimate for the current year has gone up 17.2%.

One-Year Price Performance





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 valuation picture.

Industry Outperforms S&P 500 and Sector in Terms of Shareholder Returns
 
The Zacks Medical-HMO industry has outperformed both the Zacks S&P 500 composite and its own sector over the past year.

We see that the stocks in this industry have collectively gained 29.5% over the past year, while the Zacks S&P 500 composite and Zacks Medical Sector have rallied 7.6% and 4.8%, respectively.

HMO Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing HMO stocks, the industry is currently trading at 17.96X compared with the S&P 500’s 16.28X and the sector’s 19.41X.
Over the past five years, the industry has traded as high as 20.08X, as low as 11.97X and at the median of 15.76X.

Price-to-Earnings (P/E) Ratio (F12M)

 

Price-to-Earnings (P/E) Ratio (F12M)


 

Bottom Line

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 healthy balance sheets should keep the mojo alive for HMOs.

Also, the midterm election, which saw the passage of ballot initiatives to expand Medicaid under the ACA, is a positive for the industry. The gaining of control in the House of Representatives by the Democratic Party also implies that the repeal of ACA is unlikely in the near term. This bodes well for HMOs as increasing member enrollment in Medicare and Medicaid should aid their top line.

HMO Stocks to Buy Now

One of the stocks in the Zacks Medical-HMO space currently sports a Zacks Rank #1 (Strong Buy). 

You can see the complete list of today’s Zacks #1 Rank stocks here.
 
Molina Healthcare Inc. (MOH - Free Report) : The Zacks Consensus Estimate for current-year earnings of this Long Beach, CA-based company has moved 3.2% north over the past seven days.

Price and Consensus: MOH


 

We are also presenting three stocks with a Zacks Rank #2 (Buy) that is well positioned to grow.

Anthem Inc. (ANTM - Free Report) : The Zacks Consensus Estimate for 2018 earnings of this Indianapolis, IN-based company has been revised 0.1% upward over the past seven days.

Price and Consensus: ANTM



Humana Inc. (HUM - Free Report) : The Zacks Consensus Estimate for 2018 bottom line of this Louisville, KY-based company has been raised 0.6% over the past seven days.

Price and Consensus: HUM


 

UnitedHealth Group Inc. (UNH - Free Report) : The Zacks Consensus Estimate for this Minnetonka, MI-based company’s 2018 earnings has gone up 0.3% over the past 30 days.

Price and Consensus: UNH


 

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