Wall Street analysts bet on future for insurers, devicemakers and maybe hospitals

Wall Street analysts say the future looks bright—and lucrative—for insurers and medical devicemakers, but it's a more complicated story for hospitals.

Low medical costs and booming Medicare Advantage enrollment have helped boost health insurers' top lines, A.J. Rice, managing director of equity research at Credit Suisse, said during a panel discussion Thursday hosted by the Nashville Health Care Council.

All five major national health plans are gaining share in Medicare Advantage as seniors age into the program at a rapid clip, Rice said. And analysts expect the insurance companies, most of which will report quarterly financial results in the next couple of weeks, to reap big benefits from the GOP tax overhaul that reduces the corporate tax rate from 35% to 21%.

The nation's biggest insurer UnitedHealth Group said it expects to gain an extra $1.7 billion in earnings in 2018 thanks to the tax reform.

Meanwhile, medical-device makers are benefiting from the slashed corporate tax rate, as well as the two-year delay of the 2.3% medical-device tax.

Kristen Stewart, a director at Deutsche Bank, said device manufacturers have said they plan to invest those tax reform savings back into U.S. jobs, and research and development.

Low medical costs and utilization may have helped insurers' bottom lines, but those trends have hampered the provider industry. Acute-care hospitals' financial results have been dampened by lower admissions. But Nephron Research analyst Joshua Raskin said strong pricing has helped offset those effects.

"The perception on the acute-care side is probably a little worse than what's actually being seen in the market," Raskin said.

More will be revealed on this front with public for-profit hospital chains releasing their earnings reports in coming week.

Ambulatory-care providers are benefiting from the insurance industry's push to deliver care in cheaper outpatient settings. Home healthcare providers are positioned best because care delivered in the home is often the lowest cost, said Frank Morgan, managing direct at RBC Capital Markets.

Insurers see the value there. Humana and two private equity firms have announced they are buying home health and rehab provider Kindred Healthcare for $4.1 billion. And UnitedHealth's Optum unit is buying dialysis provider DaVita's medical group for $4.9 billion, after early last year announcing a plan to buy Surgical Care Affiliates for $2.3 billion.

Many healthcare companies that are merging with, or acquiring others are seeking to integrate vertically, and are taking on unusual combinations, including insurers merging with providers, and a major pharmacy chain combining with a payer.

"We are at a point in the cycle where the typical consolidation has not really been happening, especially on the health plan side," Raskin said. Now, "you're finding that part of the cycle where strange bedfellows are going to get together."

CVS Health and Aetna's attempt to merge in a bid to lower healthcare costs was greeted skeptically.

In the $69 billion CVS-Aetna tie-up, CVS hopes to turn its retail pharmacy locations into full-fledged urgent-care clinics, but "there are just not that many primary-care doctors sitting around waiting to be hired by MinuteClinic," Rice argued.

"The things they're talking about doing are interesting long term, but they're not going to be easy to do," he said.