Zacks Industry Outlook Highlights: CIGNA, WellPoint, Humana, UnitedHealth Group and Molina Healthcare

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Jul 10, 2014, 09:30 ET

CHICAGO, July 10, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Health Insurance, including CIGNA Corp. (NYSE:CI-Free Report), WellPoint Inc. (NYSE:WLP-Free Report), Humana Inc. (NYSE:HUM-Free Report), UnitedHealth Group Inc. (NYSE:UNH-Free Report) and Molina Healthcare, Inc. (NYSE:MOH-Free Report)

Industry: Health Insurance

Link: http://www.zacks.com/commentary/33348/health-insurance-reinvention-through-obamacare

The health insurance industry has been going through a number of challenges. Of these, federal state legislative and regulatory reforms, demands of more price- and service-conscious consumers, fierce competition, shift of customer mix and uncertain economic conditions in the U.S. and abroad are to name a few.

Yet the industry is "thriving under stress." Big players -- CIGNA Corp. (NYSE:CI-Free Report), WellPoint Inc. (NYSE:WLP-Free Report), Humana Inc. (NYSE:HUM-Free Report), UnitedHealth Group Inc. (NYSE:UNH-Free Report), Molina Healthcare, Inc. (NYSE:MOH-Free Report), among others -- have reported unfaltering growth in premium as well as fees and other income over the years. In the first quarter of 2014, a 14% increase in revenues came from these insurers on a combined basis.

The Changing Face of the Health Insurance Industry

Most of the reform's provisions have been implemented in phases. So far, the carriers have handled the impact of some of the less onerous provisions of the reform (relating to MLR requirements, ban on denial of coverage due to pre-existing ailment, dependent coverage up to the age of 26, annual rate review) relatively well.

Now, the biggest question is how the most impactful provisions of the law relating to insurance exchanges, individual mandate, ICD-10 requirements, pre-existing conditions, Medicaid expansion, an annual insurance industry assessment of $8 billion for 2014 with increasing annual amounts thereafter, will affect the industry. Investor sentiment toward the reform this year and beyond will be the driving factor for managed care stocks.

Several provisions in the Health Reform -- excise tax on medical devices, annual fees on prescription drug manufacturers, enhanced coverage requirements and the prohibition of pre-existing condition exclusions -- will likely increase insurers' medical costs. Moreover, the annual insurance industry assessment will increase insurers' operating costs.

In the fourth year of its implementation uncertainty relating to the ACA reform seems a lot ironed out. Insurers are, however, seeking new ways to prosper in the changing industry.

Insurers Expanding Global Reach

Confined to national boundaries until recently, this industry is now flocking to international markets. Lesser regulations, higher margins, greater demand and lower competition are the key foreign attractions.

Companies like Cigna and Aetna, with a wide overseas presence, view their international business as a positive differentiator and key driver of higher-than-peer growth rates. Both companies intend to penetrate deeper into the emerging economies of Asia and the Middle East. In April 2014, Aetna bought U.K.-based InterGlobal, which offers private medical insurance to groups and individuals in the Middle East, Asia, Africa and Europe.

UnitedHealth is also following the same growth path. The company has expanded its reach from Australia, the Middle East and U.K. to Brazil with its buyout of AmilParticipacoes. We expect to see more international deals going forward.

Establishment of Health Insurance Exchanges (HIEs)

One of the milestones of the reform was to set up online health insurance marketplaces, or exchanges, where individuals and small businesses can shop for coverage.

HIEs are likely draw a greater number of uninsured Americans, thus expanding overall business. Data from Kaiser Family Foundation and the Congressional Budget Office indicates rapid growth in individual exchange markets, with approximately 22 million purchasing coverage online by 2016 and 24 million by 2023.

The exchanges seem to have been well received as the first enrollment session saw a better-than-expected eight million online coverage. Moreover, 35% of new HIE insurers below 35 years of age led to a favorable mix in coverage as companies want more young and healthy people to sign up. This would cover the costs and risk involved with providing coverage to the old and sick.

Insurers initially averse to participating on exchanges are now planning to jump on the bandwagon for 2015 and beyond. However, with comparative shopping options and easy access to consumer information, HIEs are likely to heighten competition among private insurers.

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