CHICAGO, Oct. 31, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Health Insurance (part 3), including UnitedHeath Group Inc. (NYSE:UNH-Free Report), WellPoint Inc. (NYSE:WLP-Free Report), Aetna Inc. (NYSE:AET-Free Report), Humana Inc. (NYSE:HUM-Free Report) and Health Net, Inc. (NYSE:HNT-Free Report).
Industry: Health Insurance (part 3)
Link: http://www.zacks.com/commentary/35091/obamacare-permanent-problem-for-health-insurers
The healthcare legislation has undoubtedly altered the regulatory landscape in ways that is not beneficial private health insurers' bottom lines. But calling it a permanent drag would be an overstatement, as well.
Health insurers are non-cyclical, recession-resistant companies that provide a necessary service and are therefore not affected by economic cycles to that same extent as other sectors. But there are nevertheless risks that will weigh on results and stock market performance. The focus of this write-up is to spotlight the headwinds facing the industry; an earlier write-up in this space had the opposite focus.
Restriction on Players
Numerous Affordable Care Act (ACA) mandates that have been chalked out for insurers place restrictions on the players. Here are those with the greatest impact:
The act imposes strict limitations on insurers' price discrimination ability: The ACA allows insurers to only charge limited differential prices on certain factors. Although insurance companies can rate on age, the oldest adult in the risk pool cannot be charged more than three times as much as the youngest adult. Similarly, smokers can be charged no more than 1.5 times as much as non-smokers. The end price discrimination is intended at creating healthy competition between players.
Medical Loss Ratios cap insurers' profits: Medical Loss Ratio (MLR) is a measure of the share of premiums that an insurer actually spends on delivering care to policyholders, rather than on administrative costs, marketing and profits. The minimum MLR mandate established by the ACA aims to control the portion of premium that goes toward non-medical expenses such as administration, marketing, overheads and profits. The MLR is set at 85% for the large group market and at 80% for the small group market.
This provision will lead to limited bottom-line growth as carriers will be forced to spend a minimum amount on the insured. Failure to abide by the MLR rule will force carriers to rebate the excess cash back to the insured or to lower the premium.
Insurers cannot reject coverage on the basis of pre-existing disease: Earlier, it was common among insurers to deny coverage to applicants with a pre-existing disease or condition. As the insurers sieved the healthy population and rejected the less favorable, claim payments were kept at bay. With this new policy, insurers must cover individuals irrespective of their pre-existing condition. This would lead to lower profit per policy as previously individuals with pre-existing conditions were charged two to five times higher than those with average health.
State-based rate reviews for unreasonable increase in insurance premium: Increase in premium of more than or equal to 10% is subject to expert evaluation to ensure reasonable cost assumption and solid evidence. This mandate put a check on unbridled rate increases by players.
Growing consumer power: Until the passage of the health reform act, the insurance companies had an upper hand in choosing whom to provide coverage and the consumer (the person receiving the healthcare) had no active role in the decision-making process. But now the trend has changed. Consumers' use of increased purchasing power and access to information to take health care decisions is one of the major threats to insurers.
Prior to reform, big insurers dominating large markets hardly ever bothered to provide even the basic information to consumers, such as the performance of health insurance policies, procedures to claim, the size of the provider network and cancellation processes. But now customers demand transparency, value, and convenience, which has left insurers grappling for innovative ways to satisfy these unmet needs. These new missions, however, are not going to be easy to execute.
Global economic woes and regulatory challenges: A fragile global economy presents a headwind for insurers looking to expand their international operations. One of the largest insurers, UnitedHeath Group Inc. (NYSE:UNH-Free Report) recently made an acquisition to reap benefits from the Brazil market but is now facing slowing growth rates in that country.
In the case of India, which remains one of the most profitable opportunities for the insurers, the regulatory environment has proved extremely challenging. China -- which merits the highest risk-adjusted opportunity ranking, largely because of its immense scale -- poses significant investment restrictions for foreign insurers entering and operating in this market.
While the above discussed factors might deeply affect the players in the industry, we do not recommend selling any stocks -- UnitedHealth Group Inc., WellPoint Inc. (NYSE:WLP-Free Report), Aetna Inc. (NYSE:AET-Free Report), Humana Inc. (NYSE:HUM-Free Report) and Health Net, Inc. (NYSE:HNT-Free Report) -- under our coverage. None of these holds a Zacks Rank #5 (Strong Sell) or even a Zacks Rank #4 (Sell).
Bottom Line
The changed regulatory landscape has undoubtedly created hurdles for industry operators that will weigh on profits and margins going forward. But it is hardly the unmitigated disaster that some industry players make it out to be. But beyond the ACA, the investment appeal of the space also reflects its perceived defensive and counter-cyclical orientation, which is very valuable in the current uncertain backdrop.
Bottom line: there are numerous challenges for the group. But there is no shortage of opportunities either.
About Zacks
Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978. The later formation of the Zacks Rank, a proprietary stock picking system; continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Click here for your free subscription to Profit from the Pros.
Get the full Report on UNH - FREE
Get the full Report on WLP - FREE
Get the full Report on AET - FREE
Get the full Report on HUM - FREE
Get the full Report on HNT - FREE
Follow us on Twitter: http://twitter.com/zacksresearch
Join us on Facebook: http://www.facebook.com/home.php#/pages/Zacks-Investment-Research/57553657748?ref=ts
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Media Contact
Zacks Investment Research
800-767-3771 ext. 9339
[email protected]
http://www.zacks.com
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.
Logo - http://photos.prnewswire.com/prnh/20101027/ZIRLOGO
SOURCE Zacks Investment Research, Inc.
Share this article