The year 2017 witnessed a lot of regulatory noise surrounding the Affordable Care Act (ACA). Also, health insurers scaled back their participation due to continued loss on public exchanges. Rising consolidation was another major issue.
The ACA had brought more Americans under health insurance plans. It largely benefitted the industry through a reduction in uninsured population, consequently adding to medical enrollment.
However, everyone was focused on President Trump’s decision to abolish the act. Although the ACA is still not repealed, Trump signed the "Tax Cuts and Jobs Act" into law on Dec 22, which would make significant changes to the law.
The tax act ends the “individual mandate” — a major component of ACA — that requires individuals to have health insurance or face a penalty fee. In the absence of the individual mandate, healthy people are likely to opt out of medical insurance. The Congressional Budget Office estimates that this would increase the count of uninsured Americans by 13 million and push premiums up by an average of around 10% from 2018 to 2027.
Despite facing stringent regulations, health insurers have shown impressive operating performance in 2017, with most of the top players clocking solid top line, bottom line and membership growth. Companies like WellCare Health Plans Inc. WCG, Anthem ANTM, Humana HUM, Centene Corp. CNC have kept raising their full-year guidance at the end of each quarter, indicating their rising operational excellence.
Increasing consolidation in the health insurance industry has led to a reduction in the number of players. Although the effect of market concentration might not have been good for consumers due to higher medical cost, it has helped the players enhance the scale of their operations and gain market share.
In 2017, although two big merger deals — Anthem with Cigna and Humana with Aetna — have been blocked by the U.S. Department of Justice, mergers and acquisitions activities continued to be rife.
The recent merger deal between two of the industry stalwarts — Aetna and CVS Health — is worth a mention here. The deal, if finalized, would join two branches of the industry, in this case health insurance and pharmacy benefit management.
However, public exchanges, formed to serve the underprivileged and patients, have not been much profitable for the insurers. They failed to attract sufficient enrollments from healthy and young individuals, which was required to balance the risk-return trade off. Health insurers like Humana, Aetna, UnitedHealth and Anthem have already started scaling back their participation from these exchanges after incurring mounting losses.
Increasing operating costs related to regulations, investments in information technology, levy of fees and taxes also weigh on health insurers’ margins. The insurers, however, are trying to manage this cost issue with the help of Accountable Care Organizations (ACOs).
Despite the challenges, the industry has gained nearly 40.6% for 2017, outperforming the S&P 500 average of 20%. The HMO industry is among the top 4% of the Zacks Ranked industries.
Stocks in Focus
We zeroed in on three stocks that have outperformed in 2017 and have also seen upward estimate revision in the last 60 days.
Molina Healthcare, Inc. MOH, a leading health maintenance organization, has rallied 41.3% in 2017. The company has also seen its Zacks Consensus Estimate for 2018 earnings being revised upward by 5.2% in the past 60 days. It has a Growth Score of A. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Centene, a multi-national healthcare company of the United States, has gained 78.5% in 2017. The company has also seen its Zacks Consensus Estimate for 2018 earnings being revised upward by 4% in the past 60 days. It has a Growth Score of B. The stock also sports a Zacks Rank #1.
The Joint Corporation JYNT, another leading managed care company, has gained 87.2% in 2017. The company has also seen its Zacks Consensus Estimate for 2018 earnings being revised upward to 6 cents from break-even expected 60 days back. Joint It has a Growth Score of A. The stock carries a Zacks Rank #2 (Buy).
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