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Aging Demography, Consolidation Brighten HMO Industry Outlook

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 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 involved 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 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 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 the most common takeovers in recent years have been in the areas of Medicare and Medicaid to tap bourgeoning demand from the retiring baby boomer population, mergers between companies from different industries of the healthcare sector were also rampant in 2018. The mega mergers of Aetna with CVS Health Corp. (CVS - Free Report) and Cigna Corp. (CI - Free Report) with Express Scripts are the best examples of inter-industry deals that led to the union of a health insurer and a pharmacy benefit manager and further concentrated the HMO industry. This also points to the fact that the industry participants are trying to expand vertically, in an effort to control medical cost.

•    The industry should also gain from an aging American population, with 10,000 baby boomers entering retiring population every single day. This senior population has fueled demand for Medicare Advantage, the private version of the government Medicare program. These MA plans have proven to be beneficial for all concerned groups — customers government and health insurers. Customers get better coverage and services, the government gains from reduction in cost of care and health insurers find these plans highly profitable and catalysts for revenue growth. Recently, CMS decided to raise the 2020 Medicare Advantage reimbursement rate by 2.53%, which is higher than the proposed a hike of 1.59%. This is another positive for the HMO players.  

•    The industry witnessed development in ancillary business in recent years for diversification of revenue sources in the wake of tough regulations laid by the Accountable Care Act. 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.

Health services business is an important growth area for HMOs, as it provides unregulated cash flows and enables players to become comprehensive health care providers. Ample scope for growth exists in the health service business calling for continued investments.

Zacks Industry Rank Indicates Solid 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 #55, which places it at the top 22% of 247 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 by 3.5%.

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 Return Underperformed S&P 500 but Outdid its Sector

The Zacks Medical-HMO industry has underperformed 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 6.8% over the past year, while the Zacks S&P 500 composite and Zacks Medical Sector have rallied 7.8% and 4.6%, respectively.

One-Year Price Performance

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 15.39X compared with the S&P 500’s 16.97X and the sector’s 20.59X.

Over the past five years, the industry has traded as high as 20.53X, as low as 13.04X and at the median of 16.21X.

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


 

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


 
Bottom Line

The replacement to Obamacare has been pushed back until after the 2020 presidential election. This means no regulatory changes will be made in the meantime, thus restoring stability to the sector which has been exposed to high regulatory conundrum for long.

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.

HMO Stocks to Buy Now

Four stocks in the Zacks Medical-HMO space currently carry a Zacks Rank #2 (Buy).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) 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 6.6% north over the past 60 days.

Anthem Inc. (ANTM - Free Report) : The stock surpassed earnings estimates in each of the four quarters, with an average positive surprise of 7.04%.

Centene Corp. (CNC - Free Report) : The Zacks Consensus Estimate for 2019 bottom line of this Louisville, KY-based company has been raised 1.4% over the past 60 days.

WellCare Health Plans, Inc. (WCG - Free Report) : The Zacks Consensus Estimate for this Minnetonka, MI-based company’s 2019 earnings has gone up 0.4% over the past 60 days.


 

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