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:
• The COVID-19 pandemic already triggered unemployment with millions of Americans losing their employer-sponsored health insurance coverage. This weakness in the employment scene will induce a loss in Commercial business, which boasts high-profit margins. This scenario will, however, cause a shift toward government-sponsored plans, such as Medicaid and Medicare. Thus, players with a wide exposure to this line of business will be winners.
• Citing expectations for an adverse effect on industry fundamentals due to the COVID-19 impact, Fitch Ratings revised its outlook for the health insurance segment from stable to negative. The rating agency projects steep claims costs associated with COVID-19 testing and treatments including hospitalizations with the spread of the virus, which will dent profitability and debt-service metrics of the health insurance players. The rating giant believes that the pandemic will drain earnings for health insurers in 2020.
• 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 the greying populace will ascend. Per 2018 U.S. Census, between 2010 and 2030, the number of individuals aged above 65 is projected to nearly double from 39 million to 73 million, a growth rate that is nearly 5 times faster than the 17% rise expected for the total population. The census estimates this group to grow from 13% to 21% by 2030, one of the fastest growth rates within U.S. population.
This senior population 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 who are eligible for Medicare, up from 25% since 2010. These plans 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 $1.3 trillion in 2025. According to UnitedHealth, the market for Medicare Advantage could scale up from roughly 35% of all seniors today to more than 50% by 2027.
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 #67, which places it at the top 26% 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.
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 Outperformed S&P 500 and Sector
The Zacks Medical-HMO industry has outperformed both the Zacks S&P 500 composite as well as its own sector over the past year.
We see that the stocks in this industry have collectively gained 15.1% over the past year, while the Zacks S&P 500 composite has lost 4.3% and the Zacks Medical Sector has gained 2.3%.
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 15.3X compared with the S&P 500’s 19.23X and the sector’s 21.37X.
Over the past five years, the industry has traded as high as 20.58X, as low as 12.48X and at a median of 16.14X.
Price-to-Earnings (P/E) Ratio (F12M)
Price-to-Earnings (P/E) Ratio (F12M)
The health insurance industry stands relieved with the Medicare for All-related uncertainty (which was hurting insurers' interest) subsiding post the exit of Bernie Sanders from the Presidential race. However, the increase in unemployment rate will augment uninsured levels, result in losses for commercial health insurance and compress the top lines of commercial health insurers with exposure to insurance. However, gains generated in Medicaid and Medicare will aid revenues of the industry players having large book of government business.
Nevertheless, the industry participants will continue to ride on technological investment and upgrade, application of blockchain technology, growth in 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 #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Select Medical Holdings Corporation (SEM - Free Report) : Earnings of this Zacks Rank #2 stock surpassed estimates in the last reported quarter by 55%. It has an expected earnings growth rate of 10.48% for 2020.
Price and Consensus: SEM
Centene Corp. (CNC - Free Report) : Earnings of this stock with a Zacks Rank of 2 surpassed estimates in three of the last four quarters (missed in one) by 3.27%. It has an expected earnings growth rate of 7.92% for 2020.
Price and Consensus: CNC
Anthem Inc. (ANTM - Free Report) : This Zacks Rank #3 company’s bottom line surpassed earnings in three of the last four quarters (missed in one) by 0.92%. It has an expected earnings growth rate of 13.63% for 2020.
Price and Consensus: ANTM
Molina Healthcare, Inc. (MOH - Free Report) : This Zacks #3 Ranked stock’s earnings beat estimates in each of the trailing four quarters by 13.79%. It has an expected earnings growth rate of 2.68% for 2020.
Price and Consensus: MOH