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 space 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:
• As life expectancy continues to increase in the United States and seniors account for a higher percentage of the total population, overall demand for health insurance for seniors will increase. According to the 2018 U.S. Census, between 2010 and 2030, the number of individuals aged 65+ is projected to nearly double from 39 million to 73 million, a growth rate nearly 5 times faster than the 17% increase expected for the total population. The census estimates this group to grow from 13% to 21% by 2030 — one of the fastest growing within U.S. population.
This senior population has fueled demand for Medicare Advantage (MA), the private version of the government Medicare program. Medicare Advantage continues to be a popular choice, serving 35% of individuals eligible for Medicare, up from 25% since 2010. These plans have also led to considerable revenue growth for the likes of UnitedHealth Group Inc. (UNH), Humana Inc. (HUM) and Anthem Inc. (ANTM - Free Report) among other health insurers. The overall Medicare market is forecast to expand from $860 billion annually in 2020 to nearly $1.3 trillion in 2025. According to UnitedHealth, the market for Medicare Advantage could expand from roughly 35% of all seniors today to more than 50% by 2027.
• The HMO industry is rapidly consolidating with mergers and acquisitions. The most common takeovers in recent years have been in the nature of horizontal expansion in the areas of Medicare and Medicaid as the players seek to garner a greater share of the attractive MA market. Lately, however, the companies have shown interest in expanding vertically and add capabilities to its supply chain through mergers and acquisitions. 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.
An increase in scale and size will place strong players to serve the health insurance market which is still underserved. According to UnitedHealth, with an estimated 85 million people representing approximately $900 billion in annual health care spending still not served in managed care in
the United States alone, players are well positioned for continued growth.
• The industry has also witnessed development in ancillary business to diversify revenue sources in the wake of tough regulations laid (via the ACA) on health insurance business. These businesses, mostly in the form of health care services, are growing rapidly, opening up 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 these provide unregulated cash flows and enable players to become comprehensive healthcare providers. Ample opportunities of growth exist in the health service business and continued investments are being made in this area. A poster child for the same is UnitedHealth’s Optum, which provides a range of healthcare-related services, including pharmacy benefit management, physician services, data analytics and more.
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 upbeat prospects in the near term. The Zacks Medical-HMO, which is a 16-stock group within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #21, which places it at the top 21% of 253 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 4.5%.
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 Return Underperformed S&P 500 but Betters Sector
The Zacks Medical-HMO industry has underperformed both the Zacks S&P 500 composite but outperformed its own sector over the past year.
We see that the stocks in this industry have collectively gained 9.7% over the past year, while the Zacks S&P 500 composite and Zacks Medical Sector have rallied 23.7% and 4.1%, 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 15.87X compared with the S&P 500’s 18.29X and the sector’s 21.02X.
Over the past five years, the industry has traded as high as 20.68X, as low as 12.59X and at a median of 16.25X.
Price-to-Earnings (P/E) Ratio (F12M)
Price-to-Earnings (P/E) Ratio (F12M)
Despite earnings outperformance by the companies, the industry has underperformed the S&P in a year’s time due to various regulatory issues and uncertainty in policy changes in case a new president gets elected. These may have kept investors away from the industry.
Shrugging aside the intermittent political disruptions, 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 Consider
Two stocks in the Zacks Medical-HMO space currently carry a Zacks Rank #1 (Strong Buy) and #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Select Medical Holdings Corporation (SEM - Free Report) : This stock with a Zacks Rank #1 surpassed earnings estimates in the last reported quarter by 50%. It witnessed an upward revision in 2019 and 2020 earnings estimates by 6.7% and 8%, respectively, over the past 60 days.
Price and Consensus: SEM
WellCare Health Plans, Inc. WCG: This stock with a Zacks Rank #2 surpassed earnings estimates in the last reported quarter by 40%. It witnessed an upward revision in 2019 and 2020 earnings estimates by 13.3% and 2.5%, respectively, over the past 60 days.
Price and Consensus: WCG
Anthem Inc. (ANTM - Free Report) : The stock surpassed earnings estimates in the last reported quarter by 0.62%. The Zacks Consensus Estimate for this Minnetonka, MI-based company’s 2019 earnings went up 0.4% over the past 60 days.
Price and Consensus: ANTM
Molina Healthcare, Inc. (MOH - Free Report) : The Zacks Consensus Estimate for 2019 bottom line of this Louisville, KY-based company increased 0.7% over the past 60 days. The stock surpassed earnings estimates by 3.32% in the last reported quarter.
Price and Consensus: MOH