- Health Insurers have provided investors with premium returns since the affordable care act was announced in 2010.
- However, there are some who believe that the Supreme Court might invalidate subsidies to state exchanges built into the ACA law, which might lead to a collapse of Obamacare.
- Turns out this is infact a reason to continue buying stocks like United Health, Aetna and their likes.
Health insurers have had an incredible run ever since the Affordable Care Act was signed in 2010. They have been benefitting from the increased number of customers flowing in from the law, and from the wellness efforts that are starting to minimize payouts. Since March of 2010 UnitedHealth (NYSE:UNH) shares are up by over 250%, Aetna (NYSE:AET) over 280%, Humana (NYSE:HUM) over 330% and Cigna (NYSE:CI) over 340%. The laggard has been Anthem (NYSE:ANTM), which runs most of the Blue Cross franchise, up “just” 160%.
There are some who believe the run is over, that the Supreme Court might invalidate subsidies to state exchanges built into the ACA law, and that the whole Obamacare edifice might then collapse.
Turns out that’s just another reason to be buying these stocks with both hands.
The reason is Medicare.
Medicare covers people over age 65. These are folks whose risks, whose near-certainty of a need for care, has long made them unsuitable for typical health care business models. During the political debate over the ACA, there were many predictions that Medicare would become a victim of reform, that the cost squeeze resulting from reform would make the system untenable.
Well, one thing Democrats and Republicans seem to agree upon is that Medicare is going to be cut. Yet health insurers, who were buying Medicare practices with both hands several years ago, remain sanguine.
The reason is that, using the full range of network control, wellness incentives and cost containment offered within the 2010 law, the insurers have kept their own costs down and made money. And if you can make money on Medicare, you can certainly make money on the lower-risk populations that now buy insurance.
No company has benefitted quite as much as United Health. Through its Optum Health unit, it has the technology to measure clinic performance, to manage chronic conditions like diabetes, to get rid of doctors who aren’t using best practices and to drive patients toward the lowest-cost services. Despite paying nearly half its $2.6 billion in operating income earned during the March quarter back to the government in the form of taxes last year, UNH still delivered almost 4% of its revenue to the net income line. The 38 cent/share dividend was supported by $1.46/share in earnings. Even when it was raised to 50 cents, it’s safe as houses.
Other companies in the group have done even better, but haven’t bought into these higher-risk populations the way United Health has. That’s why United, after gains of 20% so far this year, is looking as the acquirer when talk turns to consolidation, with both Aetna (AET) and Cigna (CI) being in the frame, even while Humana (HUM), which pioneered the business model United is moving to as a “health maintenance organization” in the 1990s, seeks its own partner.
What would consolidation mean? It would mean dominance within markets and geographic diversity, giving the winners the heft they need to keep acquiring facilities and control pricing on state exchanges, regardless of whether subsidies are maintained.
Even if Republicans should win their case, and win election, throwing the whole ACA structure out the window, a consolidated industry will be in an excellent position to call the tune on what follows, having shown what can be done with both Medicare and Medicaid patients under the ACA. And insurers still contribute more to Republican candidates than Democratic ones.
Those who resisted buying into insurers because of politics have missed a wild ride, and those who avoid the sector due to political volatility are going to miss out on more.