Implications for Health Care Sector Stocks of the Obama Victory Detailed by Experienced Analyst: 30 Million New Health Insurance Buyers in 2013

Wall Street Transcript

67 WALL STREET, New York - November 7, 2012 - The Wall Street Transcript has just published its Health Care IT Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Electronic Health Record Adoption - HIT Consolidation Activity - Platform Interoperability and Data Analytics - Analytics for Evidence-Based Care Protocols - Electronic Health Records Implementation - HITECH Act Incentives - Affordable Care Act

Companies include: Unitedhealth Group, Inc. (UNH), WellPoint Inc. (WLP), AMERIGROUP Corp. (AGP), Centene Corp. (CNC), Molina Healthcare Inc. (MOH), WellCare Health Plans, Inc. (WCG), Humana Inc. (HUM), CIGNA Corp. (CI), Aetna Inc. (AET), Coventry Health Care Inc. (CVH), Healthways Inc. (HWAY)

In the following excerpt from the Health Care IT Report, an expert analyst discusses the outlook for the sector for investors:

TWST: In addition to that issue, what are some of the key headwinds and tailwinds you are watching in this space?

Mr. Carroll: Assuming Obama wins, parts of the ACA bring some headwinds because we don't have a lot of precedent to go on. Explicit taxes will be applied to not just managed care, but all slices of the health care world. Can firms fully pass those on to customers? If, say, only half of them could be passed along for competitive reasons, margins could come down. What will the exchanges look like, and what will margins within the exchanges look like? Where will these companies play? Will WellPoint roll out an exchange product in all of its 14 blue franchise states or not? Will it pick and choose? Even if we get more visibility, there's still a lot to think about.

In terms of the tailwinds, there are questions too. What kind of volumes will come into the system? The CBO numbers talk about 30 million more people gaining insurance either through Medicaid or through the exchanges, and that's going to be volume. It's going to drive premium revenue. But how much? And how do you balance the increased top line with potentially lower margins? At the end of the day, absolute dollars or earnings may increase over some period of time, and that could be an important tailwind.

TWST: There has been a lot of consolidation in the space, and the consensus seems to be that that we will see a lot of more. How big of a role does M&A play as you develop your theses and theories?

Mr. Carroll: I think we're going to see more M&A, longer term. I think we've seen round one of M&A in two parts. Early on, we saw strategic deals as larger commercial players acquired private Medicare footprints. WellPoint bought Amerigroup. Cigna (CI) bought HealthSpring. More recently, the deals have been less strategic and more about just getting a bigger commercial footprint, a larger hunting ground. We saw Aetna (AET) buy Coventry (CVH). It's not specifically Medicare or Medicaid, but to build exchanges, to drive new Medicare Advantage products and to position themselves to maybe bid on Medicaid business in certain states.

Right now, I see potential willing sellers, but fewer buyers. It's easy to say that Centene is a big takeout candidate. I agree. But who's going to buy them? The buyers are busy right now. UnitedHealth is always a potential wild-card buyer, but United doesn't need to do anything. They are very well positioned across all the buckets of growth going forward, and I don't know that United's shareholders would be spending billions of dollars just to add more to their Medicaid footprint.

I think the big deals will be post-2014. We may see some small stuff then to get positioned for the ACA, but there's a whole school of thought that ACA could get delayed. The health insurance exchange time frame will likely be delayed. If you are thinking about buying somebody else, maybe you delay your time frame because you don't expect to have to compete in the exchange market come 2014.

TWST: As you talk to management teams, and they look ahead to 2014, what's their level of confidence?

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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