The second open enrollment season of the Affordable Care Act is now in full swing. The landmark healthcare reform faced stiff opposition from several quarters when it was first launched on Oct 1, 2013. Since then, it has gone from strength to strength.
In some cases, it has turned some of its most fervent critics into supporters, notably health insurers. This is a significant development, given their initial discomfort with the law. Now, they are playing a key role in ensuring its success going forward.
Initial Friction
In fact, President Obama had alleged insurers were inflating profits and removing coverage for individuals afflicted by disease. These feelings were reflected by the insurance industry, which perceived the administration with suspicion.
They believed the government was levying taxes, fees and numerous legislations which were superfluous. Insurers were wary of the fact that payment rates could be reduced at any time and profit margins forcibly reduced downward.
Symbiotic Relationship
However, over time, the relationship between the government and the insurance industry has become symbiotic in nature. This has become crucial to the success of the country’s biggest healthcare plans. It has also fuelled the sharp increase in Medicaid enrollments, which have been a profitable one for insurers.
Health insurers have provided the administration with assistance during several litigations over the ACA. Additionally, in 2013, UnitedHealth Group Inc. (UNH) assisted in the repair of the enrollment website following its crash during the first days of its rollout.
Share Prices Jump
Ever since the ACA was signed into a law, the share prices of the four largest insurers have jumped significantly, Aetna Inc. (AET), Cigna Corp. (CI), Humana Inc. (HUM) and UnitedHealth have increased over 100%. In comparison, the S&P 500 has risen around 70%.
These stocks have also clocked up significant gains over the 13 months since the rollout of the Obamacare exchanges. WellPoint Inc. (WLP) has gained nearly 51% and was recently trading at an all-time high of $128.16. Over the same period, Humana has gained 49.8%, Cigna has gained 33.2% and Aetna has increased 35.8%.
Enrollment, Revenue Share Rises
According to UnitedHealth Group chief executive Stephen J. Hemsley, Medicaid enrollment has increased by 24% or around 1 million individuals. Recently, WellPoint said the company has added 699,000 new members from Medicaid and 751,000 subscribers via healthcare exchanges.
In fact, Medicaid enrollment for the company has risen 16%, amounting to five million people. WellPoint’s chief executive Joseph R. Swedish said that government business contributed to 45% of consolidated operating revenues.
In its third quarter earnings report, Aetna said the company had experienced “excellent performance in our government business, which now represents more than 40% of our health premiums.” According to Humana, Medicaid Advantage plans provide 65% of its revenues. For the year ended Sep 30, enrollment for these plans increased by 17.5% to 2.9 million.
Our Choices
The reliance of the government on private insurers to ensure the successful implementation of the ACA has increased over time. Industry watchers expect this trend to continue. Below we present two stocks which will gain from these trends, each of which also has a good Zacks Rank.
Centene Corp. (CNC) offers programs and services to individuals without insurance and those who are uninsured. Centene provides services through local staff that provide assistance in accessing care and coordinating referrals to services. The company also clarifies member concerns and addresses their questions. The company also has programs to educate and inform members to help them get access to suitable healthcare services.
Centene Corp. holds a Zacks Rank #2 (Buy) and has expected earnings growth of 50%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 22.29.
UnitedHealth Group is a diversified health and well-being company. The company reports through four segments. Its largest segment is UnitedHealthcare, which accounts for approximately 77.0% of 2013 revenues. One of its units, UnitedHealthcare Community & State, provides network-based health and well-being services to beneficiaries of State Medicaid and Children’s Health Insurance Programs and other government-sponsored healthcare programs.
Apart from a Zacks Rank #2 (Buy), the company currently has expected earnings growth of 2.6%. At the same time, stock price has increased 28.7% year to date. Additionally, yearly earnings consensus has increased 6 cents over the last 60 days. UnitedHealth has a P/E (F1) of 17.15x.
The extent of Obamacare’s success has been proven over time. Health insurers have also gained from this trend and seem to be integral to its long-term success. This is why these stocks would make good additions to your portfolio.
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