Stocks at publicly traded health insurers, which skyrocketed in 2014, should remain strong market performers this year, despite the overall market's early setbacks this week, analysts predict.
Insurers with large volumes of government business should lead the pack, analysts add.
“The ACA did not present as many problems for the industry as some investors had assumed,” explained Steve Halper, a managed-care analyst at FBR Capital Markets & Co.
Several specific challenges loom that could disrupt insurers' stocks later this year, including a Supreme Court case and rate setting for Medicare Advantage. But for now, insurers still sit among the hottest blue chips.
The big 11 for-profit insurers saw their shares rise a collective 40% in 2014. That significantly outpaced the 11.4% gain for the Standard & Poor's 500, the index that tracks 500 of the largest publicly traded companies. Insurance companies also outpaced the S&P 500 Health Care index, which rose 23.3% for the year.
Health Net, based in Woodland Hills, Calif., scored the biggest gain among insurers last year. Its stock soared more than 80%, closing 2014 at $53.53 a share. Citi Research analyst Carl McDonald called Health Net the “stock of the year” for managed-care companies. Centene Corp., Molina Healthcare and Humana were right behind with their shares up 76%, 54% and 40%, respectively.
A common denominator for the four is large proportions of enrollees in government programs. About 75% of Humana's revenue comes from Medicare Advantage and the private Medicare option is expected to grow to an even larger share of its business.
“The government-focused health plans, that's where the growth is right now,” said Chris Rigg, an analyst at Susquehanna Financial Group.
Centene, Health Net and Molina all rely heavily on Medicaid. States have shown larger appetites to use managed-care companies for Medicaid enrollees. It's also been beneficial for insurers if they operate in states that expanded Medicaid under the Affordable Care Act.
The stocks of Anthem, UnitedHealth Group, Aetna, Universal American, Cigna Corp. and WellCare Health Plans all increased between 16% and 38% year over year. Those companies also are major players in Medicare Advantage and Medicaid.
But Aetna, Anthem, Cigna and UnitedHealth have relatively larger chunks of the employer-supplied insurance market. Although more employers are taking the self-insured route—a generally less profitable field for them—fears of workers being dumped onto the federal and state exchanges didn't pan out. And costs among the commercially insured remained “relatively benign,” Rigg said.
That may be due, in part, to more employers using high-deductible health plans, which require employees to pay more out of pocket for their healthcare costs. “The overriding positive was medical costs came in lower than expected,” Halper said.
Analysts view UnitedHealth and Aetna as two of the strongest insurers going into this year. That's because they have profitable Medicare and Medicaid plans in addition to their dominating presence in the employer market. They also are investing more in the growing exchange population. UnitedHealth is selling ACA plans in 23 states in 2015; Aetna is in 18.
Insurers' stocks will face some unknowns in 2015, however. They will have to weather another round of Medicare Advantage rate calculations from the CMS. Rates coming in lower than expected would directly eat away at their profit margins. Early projections from the CMS show a 2% increase (PDF) in 2016, but those figures are far from being finalized.
The U.S. Supreme Court also will rule on the King v. Burwell case this summer. Analysts believe a decision invalidating exchange subsidies likely won't hurt insurers much in the short term since the individual market represents such a small slice of their top and bottom lines. But it could have major ramifications for the industry if an adverse ruling ultimately leads to the collapse of the ACA. And how investors would react to a ruling is open to question.
“I'm not sure that the healthcare industry has come to grips with the prospect yet,” said Jonathan Oberlander, a health policy and social medicine professor at the University of North Carolina. “Even though it is a modest share of business overall … if you fast forward the next few years, the growth in private insurance is all in this private market.”
Follow Bob Herman on Twitter: @MHbherman
