Global investment bank Goldman Sachs on Tuesday kicked off its equity coverage of publicly traded U.S. health insurers with a lengthy inaugural report that generally gave a rosy outlook for the sector.
Goldman initiated coverage of 10 insurers, half of which received 'buy' ratings in the newest report: UnitedHealth Group, Anthem, CVS Health, Molina Healthcare and Alignment Healthcare. Another four were rated 'neutral:' Humana, Cigna, Centene and Bright Health Group. Just one, Oscar Health, got a 'sell' rating.
Goldman analysts Nathan Rich and Lindsay Golub wrote that they project 13% earnings per share growth for large-cap managed care organizations over the course of 2022 and 2023, more than double their expected earnings growth across the S&P 500 of 6%.
"The growing momentum behind value-based care and efforts to diversify into provider services position the MCOs well to begin to bend the medical cost curve and capitalize on new profit streams," the analysts wrote.
Rich and Golub, who did not respond to requests for comment, said they think insurers' medical spending will gradually—and haphazardly—trend in the direction of normal in 2022 as patients return for services, although utilization will remain muted because of hospital staffing constraints, continued deferred care and shifts to lower-cost settings. They noted that insurers have priced their plans conservatively to account for returning care and ongoing COVID-19 treatment and testing.
Employee benefit managers expect medical cost growth of 5.8% 2022, compared with 5.3% in 2021, according to Goldman's survey of 50 employee benefit managers across all company sizes. This year's growth figure is up from 4.8% in 2020.
Employers with UnitedHealth Group as their insurer estimated they'd see the highest medical cost growth in 2022, at 6.8%. Employers with Aetna, part of CVS, expect the lowest growth, at 4.4%.
The report spent a lot of time delving into what the authors described as a significant profit opportunity in Medicare Advantage. The analysts said that the senior coverage program's $350 billion market can capitalize on demand for primary care, additional room for capitation and strong bipartisan support at the policy level.
Goldman highlighted UnitedHealth Group and Humana as having particularly high profit potential in MA because of their ability to manage medical costs through their provider assets. Owning providers is the most capital intensive value-based care model, but also the most profitable, the analysts noted. UnitedHealth Group is doing this through its OptumCare, and Humana through its senior-based medical care group, CenterWell, and its Medicare-focused private equity joint venture, Partners in Primary Care.
CVS also stands to profit from MA through its planned rollout of up to 350 primary care clinics, which could net it up to 36% of the addressable market.
The report also hinted at further government regulation of the program if it doesn't yield savings or quality improvements. That could take the form of lower rates or changes to risk coding. Just a few months ago, a top official with the Centers for Medicare and Medicaid Services questioned the future of MA payments after a government watchdog report found the plans were making their members look sicker than they really were to maximize payments.
Possible tailwinds for the insurers could include rising interest rates, inflation and a supportive policy backdrop ahead of the midterms, the report said.
The analysts attributed their sell rating for Oscar to the risk it faces from new competition in its key markets. They said the largest markets for Affordable Care Act health insurance exchange plans—Florida, California and Texas—have seen an influx of new entrants that are disruptive to existing insurers. Oscar's stock price plummeted by more than 20% on Tuesday. The company did not respond to a request for comment.