A number of macroeconomic and political events like an increase in interest rates and inflation, trade tariffs, rise in oil prices have lent uncertainty and volatility across the markets this year, affecting a numbers of sectors and industries. But one industry that still has its head held high is health insurance, primarily because the relatively inelastic demand for its products and services largely has a domestic focus, which keeps it well insulated from international headwinds, including trade war fears and tariff concerns.
Unlike last year, when there was a lot of noise in the industry from change in regulations, which ultimately saw the repeal of the individual mandate, the industry so far this year has been quiet on this front. Positive regulatory news, however, came up last month when the U.S. Department of Labor announced the new Association Health Plans (AHP).
Higher Enrollment and Other Catalysts
With the U.S. economy on firm footing and regulations slowly easing, the industry looks well rooted for growth. Rising enrollment and top-line growth, increasing contribution from complementary businesses, product modifications, improved service, demographic changes, expansion of international operations, better claims handling, medical cost management, technological investment and upgrade, mergers and acquisitions and healthy balance sheets have held the mojo for health insurers.
Per a McKinsey & Co. report, the private payor market in North America is expected to grow from €583 billion in 2010 to €1,421 billion in 2025.
Strong Growth From Retiring Baby Boomers
Medicare and Medicaid — the government sponsored programs for the retiring population and the under privileged — have been in great demand from a huge population of baby boomers entering retirement ages. Moreover, the expansion of Medicaid has led to an increase in enrollment in this plan. Both these plans have seen increased participation of private health insurers as states reach out to them to effectively manage costs of these plans, which have been a huge burden on the federal budget.
Medicare and Medicaid together account for nearly 60% of the revenues for the major health insurers. Revenues from these plans have more than doubled from 2010-2016.
Increasing Revenues From Other Sources
Though health insurance coverage remains the main business in this industry, players have started to develop additional sources of revenues for diversification benefits. Major health insurers have developed a portfolio of products and services aimed at creating a holistic and integrated approach to individual health and wellness. These products and services, which include care delivery, population health management and engagement, health financial services, health IT, benefit operations, care operations and pharmacy care services complement their core business lines.
In this context, UnitedHealth’s health services segment Optum is its poster child. The segment has been growing for the past many years and now accounts for a greater portion of the company’s total revenues.
What Will Keep the Momentum Alive?
The recent regulation regarding the affordable health plans for small businesses across the United States which will be effective from Sep 1 should be a net contributor to health insurers’ revenues. The plan aims to provide the same healthcare benefits to employees of smaller companies that are enjoyed by workers of bigger businesses. Such a provision provides small firms the power to negotiate costs and flexibility of healthcare coverage.
The move is touted to assist small businesses that are vulnerable to the rise in healthcare costs. Further, approximately 11 million Americans, working for such firms would benefit from this development. This would also lead to higher demand for health insurance plans.
Moreover, efforts to control costs via the formation of Accountable Care Organizations, which is a network of healthcare providers aimed at providing efficient care at low cost, use of blockchain technology, preventive care techniques and big data will aid earnings.
A strong balance sheet across the industry characterized by an increase in free cash flow will lead to increased share buyback and in turn aid the bottom line. Also, investments in business should lead to long-term growth.
Year to date, the industry has gained 10.9% compared with the 2.2% growth of the S&P 500 index and a decline of 1.5% for the Zacks Medical Sector.
The industry’s growth has been relentless and there appears no roadblock in the near future. Thus investing in this space should be a wise choice especially at a time when the other sectors are facing the heat.
Thus we point out four stocks with a Zacks Rank # 1 (Strong Buy) or 2 (Buy) that have witnessed positive estimate revision for their current-year earnings. Moreover, each of these stocks has outperformed the industry by 10% year to date.
WellCare Health Plans, Inc. (WCG - Free Report) with a Zacks Rank #1 is the provider of managed care services for government-sponsored health care programs.
The Zacks Consensus Estimate for the current year has improved 2.3% over the last 60 days. The stock has gained 23% year to date. You can see the complete list of today’s Zacks #1 Rank stocks here.
Triple-S Management Corp. (GTS - Free Report) carrying a Zacks Rank of 2 is the largest managed care company in Puerto Rico that offers a broad portfolio of managed care and related products in the commercial, Medicare and Reform (similar to Medicaid) markets.
The Zacks Consensus Estimate for the current year has improved 2.7% over the last 60 days. The stock has added 57% so far this year.
Humana Inc. (HUM - Free Report) with a Zacks Rank #2 is a provider of retail, group and specialty healthcare insurance services.
The Zacks Consensus Estimate for the current year has improved 0.4% over the last 60 days. The stock has gained 20% so far this year.
Molina Healthcare, Inc. (MOH - Free Report) , sporting a Zacks Rank #1, arranges for the delivery of healthcare services and offers health information management solutions to individuals and families that receive their care through Medicaid, Medicare and other government-funded programs.
The Zacks Consensus Estimate for the current year has improved 26.9% over the last 90 days. The stock has gained 29% so far this year.
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