The Health Maintenance Organization (HMO) industry has consistently outperformed the S&P 500 over the last five years with its 285.2% appreciation, easily trumping the S&P 500’s 90.2%. But the industry started pulling even further ahead in 2015 and again after the election of President Donald Trump. It is currently in the top 9% of Zacks industries.
HMOs have been around for ages, but their prominence in recent years is related to rising medical costs with the consequent pressure on insurers’ profitability and the belief that timely checkups and preventive services can reduce expenditure. Moreover, HMOs generally consist of a network of physicians (general physicians, specialists, geriatricians, etc) and insurers, where covered individuals can get cheaper services by making copayments. Services from other medical professionals are generally not covered by the HMO.
President Obama’s Affordable Care Act (Obamacare) included mandates for individuals to buy insurance, provided for the expansion of Medicaid eligibility and offered subsidies to individuals so they could do the needful. The Graham-Cassidy-Heller-Johnson (“GCHJ”) bill or the Graham-Cassidy bill seeks to strike down these aspects of the law, instead providing block grants to states, offering them the flexibility to frame their own healthcare laws while putting a ceiling on the amount of aid per person from the center and increasing it at a rate that is slower than health care inflation. Needless to say, the decision will be very hard to implement and the outcome, uncertain.
The Congressional Budget Office (CBO) put out a hurried preliminary report analyzing the change. Its main finding was that while the change would reduce the on-budget deficit between 2017 and 2026 by at least $133 billion, there would be a significant decline in insured individuals arising from the decline in Medicaid enrollment, decline in non-group coverage because of elimination of subsidies and decline in all kinds of health insurance because of the removal of penalties. These would be partially mitigated by state programs that would however be hard to frame and implement in the limited time.
The uninsured rate (people without insurance for the whole year) was 8.8% or 28.1 million in 2016 (as measured by the CPS ASEC, US Census Bureau), but if Obamacare is withdrawn, it’s expected that uninsured individuals would increase by 18 million through 2019 and 21 million through 2026. (Business Insider quoting Brookings Institution and Commonwealth Fund). Lower insured levels increase demand for affordable healthcare, which is positive for HMOs. Of course, many HMOs also cater to Medicaid and schemes mandated by the government, so they stand to benefit no matter which way the law goes.
Demographics also remain favorable for the industry with an aging population (baby boomers), more in need of affordable, long term healthcare. Since both this segment and the impacted by injury/incapacitation are incapable of or have limited capability of earning money and therefore, paying insurance premiums, they primarily require managed healthcare, such as provided by an HMO. Tech Navio estimates that chronic diseases such as heart disease, cancer, type 2 diabetes and arthritis that have become common across the globe will contribute to an 11% compounded annual growth rate in health insurance enrolments through 2020. This, along with low penetration rates across the world, especially in emerging markets create a good backdrop for HMO expansion.
Technology is playing a bigger role in digitizing patient information and tools like smartphones and wearables are increasing involvement of millennial customers in their own healthcare. Moreover, millennials are thriftier than boomers, so lower-cost health management solutions are likely to be more attractive.
The strong growth drivers have led to a 41.0% increase in HMO revenue over the past five years with a 35.6% increase in EBITDA and 34.1% increase in earnings before non-recurring items.
Given the nature of the industry, regulatory pressures are likely to persist along with related compliance costs. The need for technology integration to cater to changing customer needs is likely adding to the cost pressure. But top line growth should continue, evening things out over time.
5 Great Stocks For Your Portfolio
Here are five Buy-rated stocks from the HMO segment that also have a VGM (value-growth-momentum) score of A, meaning that they are attractive picks for investors irrespective of their risk appetite or investment horizon.
Magellan Health, Inc. (MGLN - Free Report)
Magellan Health is an American for-profit managed health care company, focused on behavioral healthcare. As a specialty health care manager, it focuses on some of the most complex and costly health care services. Working together with health plans, employers, government agencies, consumers, service providers, fellow employees and many other stakeholders, the company acquires a full perspective of an incident or situation to deliver effective and innovative solutions. The company has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Centene Corporation (CNC - Free Report)
Centene Corporation provides multi-line managed care programs and related services to individuals receiving benefits under Medicaid, including Supplemental Security Income (SSI) and the State Children's Health Insurance Program (SCHIP). It operates through two segments, Managed Care & Specialty Services. The Managed Care segment offers Medicaid and Medicaid-related health plan coverage to individuals through government subsidized programs, including Medicaid, the State children's health insurance program, long-term care, foster care, and dual-eligible individual, as well as aged, blind, or disabled programs. The Specialty Services segment provides pharmacy benefits management services; health, triage, wellness, and disease management services; vision services; dental services; correctional healthcare services; in-home health services; and integrated long-term care services, as well as care management software that automate the clinical, administrative, and technical components of care management programs. The company has a Zacks Rank #1.
Molina Healthcare, Inc (MOH - Free Report)
Molina Healthcare, a multi-state health care organization, arranges for the delivery of health care services and offers health information management solutions to individuals and families who receive their care through Medicaid, Medicare and other government-funded programs. Molina Healthcare offers Medicaid, contracts with state governments and serves as a health plan, providing a wide range of quality health care services to families and individuals who qualify for government-sponsored programs, including Medicaid and the State Children's Health Insurance Program (SCHIP). Molina Healthcare offers Medicare Advantage plans designed to meet the needs of individuals with Medicare or both Medicaid and Medicare coverage. Molina Medicare plans offer comprehensive, quality benefits and programs including access to a large selection of doctors, hospitals and other health care providers at little or no out-of-pocket cost. The company has a Zacks Rank #1.
Anthem, Inc. (ANTM - Free Report)
Anthem provides medical products through its subsidiaries. It operates through Commercial, Consumer and Other segments. The company offers managed care plans to the large and small employer, individual, Medicaid and senior markets. Anthem, Inc., formerly known as WellPoint, Inc., is headquartered in Indianapolis, Indiana. The company has a Zacks Rank #2 (Buy).
Nobilis Health Corp.
Nobilis Health Corp. owns and manages ambulatory and acute care facilities for healthcare services. In addition, it owns and manages ambulatory surgery centers, acute care hospital, imaging centers and urgent care clinic. The company operates primarily in Houston, Dallas and Scottsdale, Arizona. Nobilis Health Corp. is headquartered in Houston, Texas. The company has a Zacks Rank #2.
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