In spite of strong fundamentals, the health insurance industry has underperformed so far this year due to regulatory noise.
The Zacks Medical-HMO, industry, which comprises health insurance stocks, is down nearly 2% year to date compared with the Zacks S&P 500 composite’s gain of 11.2%. The decline in the industry is mainly due to investors’ apprehensions stemming from the proposal of "Medicare for All" by Democrats - an agenda for the 2020 presidential elections.
The proposal seeks to eliminate private health insurance and replace it with a universal Medicare plan on the premise that the same would reduce administrative inefficiencies and control costs in the health-care system.
All the major industry participants are against the proposal, since it would replace the current private insurance plans and eat into the earnings of health insurers.
UnitedHealth Group’s CEO said on the company’s first-quarter earnings call that Medicare for All would “surely jeopardize the relationship people have with their doctors, destabilize the nation’s health system and limit the ability of clinicians to practice medicine at their best.”
Recently, another major health insurer Humana opposed the proposal as it will not support any legislation making private health coverage illegal.
Though nothing of this proposal gets transpired now (at least till 2021), when the election is finalized, the uncertainty caused by the proposal is enough to push investors away from the industry, which is highly policy-regulated.
Medicare and Medicaid to Drive Growth
Keeping this noise aside, a look at the fundamentals shows the industry’s going strong with rise in revenues and enrollment, solid balance sheets and stable growth in margins.
The most prominent factor driving growth for the players would be the changing U.S. demography, which features the growing baby boomer population, which is driving demand for Medicare Advantage (“MA”) plans, a substitute for Government-sponsored Medicare plan for retirees. The segment remains underpenetrated with large untapped market potential. Based on the CMS March 2019 Medicare monthly enrollment report, MA grew by 7.4% year over year. Furthermore, most of the players in the industry have expanded their MA geographic presence to capture market share, having done so mainly via mergers and acquisitions, and buyouts. The same has also trigged massive consolidation in the health insurance industry, in recent years.
Another attractive growth opportunity for health insurers is Medicaid. Over the past decade, states have continued to move toward managed care in an effort to better manage rising costs and as a result of ACA expansion. As many as 36 states have opted for Medicaid Expansion, with the remaining 14 apparently having very low chances given their republican control. Of these 14 states, Texas and Florida look most promising, though no substantial Medicaid development has been seen here.
A strong balance sheet has allowed players to consolidate through acquisitions. Recent mergers in the health insurance space have brought health insurers and pharmacy benefit managers (PBM) together. In-house PBM would allow health insurers to gain more control on drugs and therefore management of medical costs.
Though PBMs are also under government radar as they are working on cutting the role of middlemen to reduce the final pricing, nothing much has been achieved on this front either.
The regulatory developments will continue with the final rule nowhere near. In the meantime, let’s take a closer look at some of the stocks worth considering in the space. It is important to note here that geopolitical uncertainty and trade war between the United States and China are less likely to upset the health insurance as most of its business is domestic oriented.
This provides one more reason to invest in stocks of this industry.
Stocks to Consider
We have chosen some stocks in the industry that carries a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Magellan Health, Inc. (MGLN - Free Report) carries a Zacks Rank #1 and has witnessed an upward revision in 2019 earnings estimates by 0.3% over the past 30 days. The company’s 2019 earnings are expected to grow by 60% compared with the industry’s growth of 16.7%. The stock has gained 19% year to date.
Molina Healthcare, Inc. (MOH - Free Report) sports a Zacks Rank #1 and has witnessed an upward revision in 2019 earnings estimates by 9.8% over the past 30 days. The stock has gained 14% year to date.
The Joint Corp. (JYNT - Free Report) carries a Zacks Rank #1 and has witnessed an upward revision in 2019 earnings estimates by 9.5% over the past 30 days. The company’s 2019 earnings are expected to grow by 135% compared with the industry’s growth of 20%. The stock has gained 98% year to date.
WellCare Health Plans, Inc. (WCG - Free Report) carries a Zacks Rank #2. It has witnessed an upward revision in 2019 earnings estimates by 2.7% over the past 30 days. The company’s 2019 earnings are expected to grow by 27% compared with the industry’s growth of 17%. The stock has gained 17% year to date.
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