The insurance industry is on the threshold of stability and growth, despite clear signs of stress. Most players are reassessing their business model from product, pricing, risk management, distribution, claims and fraud management to a realistic pace of growth. The industry is also witnessing consolidation.
For decades, the industry has sought private sector engagement in meeting ever increasing national healthcare needs. These include the foundation of Medicare Advantage, the launch of Medicare Part D drug benefits, the formation of accountable care organizations (ACOs), steady migration of Medicaid to managed care, the expansion of benefit coverage to the uninsured under online exchanges, expanded Medicaid programs and the improvement in healthcare.gov and many state-based exchanges.
Let’s discuss some of the opportunities offered by the changing industry landscape:
A bigger pool of people coming into the insurance system because of the ACA rule that every individual must have access to insurance. The Congressional Budget Office (CBO) has estimated that by 2020, approximately 24 million people will purchase coverage through the new federal and state health insurance exchanges established by the ACA -- a substantial addition to the market.
As per research by The Urban Institute's Health Reform Monitoring Survey (HRMS), 7.3 million adults gained coverage in the first open-enrollment period which ended on Mar 31, 2014.
WellPoint Inc. (WLP), a publicly traded insurer which recorded the maximum enrollment in the new health-care market, raised its 2014 earnings guidance after having benefited from the overhaul. Another insurer UnitedHealth Group Inc. (UNH - Free Report) stated that it will expand its Obamacare exchanges to two dozen in 2015 from five this year.
A number of insurers have shown interest in increasing participation in exchanges and are submitting plans for approval for the second enrollment season, starting Nov 15.
The expansion of the Medicaid program in 2014 presents an opportunity for large insurers participating in it. The ACA expanded Medicaid eligibility in 2014 to nearly everyone under the age of 65 with income up to 138% of federal poverty levels. According to the Congressional Budget Office (CBO) the expansion of Medicaid will increase the insurance coverage by 8 million in 2014.
UnitedHealth Group Inc. and WellPoint Inc. are among the largest Medicaid providers. Other companies that traditionally focused on employer-based coverage may seek to enlarge their Medicaid plans.
The rising senior population presents growth in the Medicare segment. According to the U.S. Census data, the population of Medicare beneficiaries will grow by 36% by the end of this decade led by a vast, aging baby boomer population. In fact, in the next 25 years, the compounded annual growth rate of the Medicare population is expected to increase to 2.7% from 1.5% at present.
Revenues from managed-care plans of Medicare Advantage are expected to grow significantly as baby boomers retire. Medicare Advantage is a privately run version of the government's Medicare insurance program for the aged and disabled. Until now, only two public providers -- UnitedHealth and Humana (HUM - Free Report) -- control more than 10% of the market. However, we expect sharp consolidation in this market. Carriers in the health insurance sector are in a race to win Medicare Advantage market share and the fastest way of achieving the target is to acquire a company in the same business.
A sluggish economic growth, uncertainties in the newly enacted health care legislation and pressure on profit margins in general have led American health insurers to look to foreign markets for continued high rates of growth and profitability. Asia and Europe represent the best near-term opportunities for U.S. health insurers.
Companies like Cigna Corp. (CI - Free Report) and Aetna Inc. (AET - Free Report) , with a wide overseas presence, view their international business as a positive differentiator and key driver of higher-than-peer growth rates. Both companies intend to penetrate deeper into the emerging economies of Asia and the Middle East. In Apr 2014, Aetna bought U.K.-based InterGlobal, which offers private medical insurance to groups and individuals in the Middle East, Asia, Africa and Europe.
UnitedHealth is also following the same growth path. The company has expanded its reach from Australia, the Middle East and U.K. to Brazil with its buyout of AmilParticipacoes. We expect to see more international deals going forward.
Alternative Care Delivery Models
Several new models -- including ACO, patient-centered medical homes (PCMH) and a wide variety of evidence-based and pay-for-performance theories -- are being tested for their ability to decrease total cost of care while maintaining or improving quality.
ACO formation is rampant in the industry. ACOs are appealing to insurers as these provide a way to reduce medical cost and improve outcome. Insurers form an essential part of ACOs because these track and collect patient data, enabling the system to evaluate 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 an insurer or claims payer.
Under health reform, insurers have lost flexibility in ways that they can cope with rising medical expenses. They can no longer rely on traditional medical underwriting strategies, such as exclusion of pre-existing conditions. The most effective approach for insurers now is to rely exclusively on cost control mechanisms to manage members’ medical expenses. Under ACO, fees to physicians are paid on performance rather than on service. An ACO helps insurers to accomplish these objectives.
In June 2013, the country’s largest insurer, UnitedHealth Group, said it targeted spending about $50 billion under accountable-care contracts by 2017, compared with the then $20 billion. In June 2014, Cigna successfully reached its 100 ACO goal announced in 2012.
Developing Ancillary Businesses
Insurers are eying growth and expansion opportunities accompanying the critical challenges of modernizing the health care system. They are branching out into non-traditional areas. Over the last few years, several large insurers have acquired companies that fall outside the realm of traditional health insurance yet still complement it.
Humana acquired Antiva in 2011 to provide analytics services while Aetna invested in Health IT by acquiring Medicity. UnitedHealth has the broadest approach and the greatest potential for cross-selling synergies through its health benefits business via Optum. UnitedHealth Group's Optum division is the poster child for successful diversification. The unit includes OptumInsight, a health care analytics company; OptumHealth, which provides health management and wellness services; and OptumRx, a pharmacy benefit manager. Management at UnitedHealth is considering the expansion of its health service business to 35–40% of operating income over the long term.
Acquisitions and Strategic Partnerships
Many health insurance carriers are regularly carrying out acquisitions both domestic and international to expand their existing customer base and product lines into new markets. Not discounting the copious mergers and acquisitions over several years, the Health Care Reform has set the stage right for further consolidation. With small insurers turning inefficient, following their inability to achieve the required level of profitability, big-ticket acquisitions are the name of the game since 2011.
WellPoint bought Amerigroup to expand its supplement lines business. UnitedHealth acquired AmilParticipacoes and XL Health for a wider base and new product lines. Other significant examples are Humana buying Metropolitan Health Networks, Inc., Cigna’s buyout of Healthspring and Aetna’s acquisition of Coventry Health Care Inc. Health Insurance Innovations Inc. (HIIQ - Free Report) buyout of privately held, Silicon Valley based HealthPocket, Inc. is also prominent in this regard.
The health insurance industry has been in a flux in the recent, with many regulatory changes clouding the industry’s outlook. But most of those issues are now behind us, which is helping reduce the level of uncertainty about the industry. This makes it an attractive opportunity for investors.
Check out our latest Health Insurance Industry Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector now.