Is health insurance a hot area for investors? Actually, yes.
With more baby boomers turning 65, Medicare rolls are swelling. Medicare Advantage plans have become increasingly popular. These plans are offered by private health insurers. And they provide all of the benefits covered by the original Medicare program and then some. Enrollment is also soaring for Medicare Supplement plans (also known as Medigap plans), which helps pay some of the out-of-pocket costs that Medicare doesn't cover.
Many states have implemented Medicaid managed care programs. With these programs, states contract with health insurers or managed care companies to provide Medicaid health benefits at a fixed cost per person.
And with unemployment rates still at historically low levels, more individuals are working, which means they're more likely to have health insurance through their employers.
Image source: Getty Images.
Increased enrollment in Medicare Advantage, Medicare Supplement, Medicaid managed care, and employer-sponsored health plans is music to the ears of major health insurers. They especially benefit from growth in these areas because the more members they add, the greater their economies of scale.
What are the biggest health insurance stocks?
The top 10 biggest health insurance stocks poised to profit from these trends are:
1. UnitedHealth Group (NYSE: UNH)
2. Anthem (NYSE: ANTM)
3. CVS Health (NYSE: CVS)
4. Cigna (NYSE: CI)
5. Humana (NYSE: HUM)
6. Centene (NYSE: CNC)
7. Wellcare Health Plans (NYSE: WCG)
8. Molina Healthcare (NYSE: MOH)
9. Magellan Health (NASDAQ: MGLN)
10. Health Insurance Innovations (NASDAQ: HIIQ)
Data source: Yahoo! Finance. Market caps as of July 9, 2019.
Here's what you need to know about each of these big health insurers.
1. UnitedHealth Group
UnitedHealth Group is the world's biggest health insurance company by far. Its UnitedHealthcare business covers around 50 million individuals.
The company's health insurance segment generates more than 80% of UnitedHealth Group's total revenue. This segment is divided into four businesses:
Employer and individual
Medicare and retirement
Community and state
Increased demand for UnitedHealthcare's Medicare Advantage plans has helped the Medicare and retirement business become the fastest-growing component of UnitedHealth Group's health insurance operations. The company's other health insurance businesses also are delivering solid growth.
But UnitedHealth Group is enjoying even more revenue growth from its Optum segments, which include OptumHealth, OptumInsight, and OptumRx. OptumHealth provides health management and health financial services. OptumInsight provides healthcare technology services. OptumRx is a leading pharmacy benefits manager (PBM). These businesses are typically more profitable than the company's health insurance segment.
Anthem ranks as the largest Blue Cross and Blue Shield plan provider, covering members in 14 states. The company's subsidiaries extend Anthem's coverage to all 50 U.S. states. In total, Anthem provides health insurance to more than 40 million individuals.
The company has three segments. Its commercial and specialty business segment focuses on managed care products and services, as well as dental and vision insurance products. Anthem's government business segment includes its Medicare, Medicaid, and Federal Employee Program (FEP) plans. The company's "other" segment includes eliminations and corporate expenses not allocated to either of its other two reportable segments.
Anthem's government business segment contributes around 60% of the company's total revenue. Membership growth in the company's Medicare plans has been a key growth driver for the segment. However, Anthem's commercial and specialty business tends to be more profitable than its government business.
The company is also launching a new PBM, IngenioRx. Anthem used Express Scripts as its PBM in recent years but decided to leave Express Scripts and start its own PBM after a highly publicized dispute between the two companies.
3. CVS Health
Most people know CVS Health as one of the largest pharmacies. Its CVS Caremark business is also one of the biggest PBMs in the country. And thanks to the 2018 acquisition of Aetna, CVS Health is now one of the biggest health insurers.
This acquisition created controversy as analysts and investors questioned the wisdom of the pharmacy giant expanding into health insurance. However, CVS Health felt the synergies and opportunities to "create a new front door to healthcare" made the Aetna acquisition a smart long-term growth strategy.
CVS Health is still in the process of fully integrating Aetna into its overall business. But Aetna already makes a big financial impact for the company, contributing nearly 30% of total revenue. Strong demand for its Medicare products continues to drive Aetna's revenue growth.
Of course, CVS Health's legacy businesses remain very important to the company. The company's pharmacy services segment, which includes its CVS Caremark PBM and Silverscript Medicare Part D prescription drug plan business, generates more than half of total revenue. CVS Health's retail and long-term care (LTC) pharmacy business continue to be the company's second-biggest source of revenue.
A major acquisition made a greater impact on Cigna than CVS Health's buyout of Aetna. In 2018, Cigna acquired Express Scripts, one of the biggest PBMs in the world. Prior to the acquisition of Express Scripts, most of Cigna's revenue came from its commercial and government health insurance plans. That's no longer the case.
Cigna now is organized into five business segments. The biggest in terms of revenue generation is the health services division, which consists primarily of the Express Scripts PBM business. This segment contributes around 70% of Cigna's total revenue.
The company's integrated medical segment includes the core operations of what could be called the "old Cigna" that existed prior to the Express Scripts acquisition. This segment continues to enjoy solid growth as premiums increase for its Medicare Advantage and Medicare Part D plans and as the company attracts more commercial customers.
Cigna also now has three smaller segments: international markets, group disability and other, and corporate. The international markets segment includes Cigna's supplemental health, life, and accident business. The group disability and other division primarily markets disability and life insurance products. The corporate segment includes any revenue or expenses not allocated to the other business segments.
Humana has been at the center of more deal rumors than any of the big health insurers on the list. The company was thought to be a potential buyout target for Walgreens Boots Alliance or Walmart. Humana and Aetna tried to merge in 2017 but the deal was blocked by a federal court. In June 2019, Humana squelched rumors that the company might acquire Centene.
There's one significant deal that Humana did finalize, though. In the third quarter of 2018, the company acquired a 40% stake in Kindred At Home, which includes the former home health business of Kindred Healthcare and the hospice business of Curo Health Services. And while rumors that Walgreens might buy Humana haven't panned out, the two companies are working closely together on one front: Humana is operating senior-focused primary care clinics within Walgreens stores in Kansas City.
Humana operates three business segments: retail, group and specialty, and healthcare services. The retail segment primarily focuses on marketing Medicare plans. Humana's group and specialty segment targets the employer group market with health insurance plus dental, vision, and other insurance products. The company's healthcare services segment includes its PBM and Kindred at Home home health and hospice interest.
The company makes more than three-quarters of its total revenue from Medicare Advantage plans, including individual and group plans. Humana's second-largest source of revenue is its employer group business, which contributes nearly 10% of total revenue.
Centene ultimately didn't become an acquisition target for Humana. However, Centene plans to make a major acquisition of its own by buying Wellcare Health Plans. The combination of the two companies would make Centene the fourth-largest health insurer in the country.
Shareholders of both Centene and Wellcare have approved the acquisition. Federal and state regulators must also OK the deal. The companies expect that the transaction will be finalized in the first half of 2020.
In the meantime, Centene continues to focus largely on the Medicaid managed care market. The company makes more than two-thirds of its total revenue from Medicaid. This is significantly higher than in the past primarily because of Centene's 2018 acquisition of Fidelis Care.
Centene also has a significant presence in the commercial and Medicare plan markets. The company competes in several state Health Insurance Marketplaces established after the implementation of the Affordable Care Act (ACA). Centene's Medicare business markets Medicare Advantage and Medicare Supplement plans, as well as special plans approved by Medicare.
7. Wellcare Health Plans
It makes sense that Wellcare Health Plans would attract interest from Centene. The two companies' businesses are similar.
Like Centene, Wellcare makes most of its money -- nearly two-thirds of total revenue -- from its Medicaid operations. Wellcare's Medicaid business focuses on five states: Florida, Illinois, Kentucky, Michigan, and Georgia. The company has expanded its presence in Florida especially, winning a five-year contract to provide statewide managed care services to children with medically complex conditions. It went into effect in February 2019.
Also like Centene, Wellcare has significant Medicare operations. The company sells Medicare Advantage and Medicare Part D prescription drug plans. Wellcare's Medicare health plans business contributes more than 30% of its total revenue.
Wellcare's 2018 acquisition of Meridian enabled the company to enter the PBM business. In addition, the deal gave Wellcare a small footprint in Michigan's Health Insurance Marketplace.
8. Molina Healthcare
Molina Healthcare's business model is also similar to those of Centene and Wellcare. Molina focuses on the "three Ms": Medicaid, Medicare, and marketplaces (Health Insurance Marketplaces, that is).
The company's Medicaid business generates over three-quarters of Molina's total revenue. The biggest components of this business are the Temporary Assistance for Needy Families (TANF), Children's Health Insurance Program (CHIP), and Aged, Blind, or Disabled (ABD) programs.
Molina makes around 14% of its total revenue from its Medicare business. A large portion of this Medicare revenue comes from premiums received from Medicare Advantage Medicare-Medicaid plans (MMPs), which provide integrated benefits for individuals who are eligible for both Medicare and Medicaid.
Around 10% of Molina's total revenue comes from marketing plans on Health Insurance Marketplaces. The company is especially strong in the Texas market, but also generates significant revenue in California, Florida, Michigan, Ohio, and Washington.
9. Magellan Health
Magellan Health could soon be gobbled up by another health insurer. Anthem and UnitedHealth Group are two top companies reported to be potentially interested in acquiring Magellan.
Magellan Complete Care provides integrated solutions for physical health, behavioral health, pharmacy benefits, diagnostics, specialty services, and long-term support services. This business generates around 35% of its total revenue.
The company makes around one-third of its total revenue from its pharmacy management segment. This segment primarily consists of Magellan's PBM operations.
Magellan's behavioral and specialty health business provides behavioral health and employee assistance program services, as well as musculoskeletal, cardiac, advanced imaging, and physical medicine management services to health plans, employers, and government health programs. This business contributes nearly 30% of Magellan's total revenue.
10. Health Insurance Innovations
Health Insurance Innovations is the oddball in the list of the top 10 biggest health insurance stocks. The company isn't a traditional health insurer. Instead, Health Insurance Innovations operates a cloud-based technology platform for individuals to purchase health insurance, life insurance, and supplemental plans. It also is a third-party administrator (TPA), which processes health insurance claims and handles other administrative functions for employers.
The company makes most of its money from commissions earned when customers buy insurance plans through its platform. Nearly 40% of Health Insurance Innovations' total revenue comes from commissions on short-term medical (STM) plans. The STM market should continue to be a strong growth driver for the company in the future, especially with a new rule implemented in October 2018 that allows for longer-duration STM products.
STM plans provide individuals with coverage for only a limited period of time, usually for up to six months although some plans provide coverage for up to 12 months. They're typically purchased by individuals who are between jobs, waiting for other health insurance to start, or who have recently turned 26 and can't be covered by their parents' insurance any longer. However, STM plans aren't legally required to cover all of the benefits that other health insurance plans do.
There's a risk for Health Insurance Innovations with its dependence on selling STM plans, though. Some politicians oppose marketing the plans because they don't provide enough benefits. While the Trump administration has promoted STM plans, a future presidential administration could make changes that negatively impact Health Insurance Innovations.
More than one-third of Health Insurance Innovations' total revenue stems from commissions related to health benefit insurance plans (HBIPs). Commissions on supplemental insurance products contribute roughly one-quarter of the company's total revenue.
Health Insurance Innovations' acquisition in June 2019 of TogetherHealth gives it a new opportunity to reach the senior market. TogetherHealth operates a platform for individuals to connect with insurance companies with a special focus on the over-65 insurance market.
Risks for these health insurance stocks
Each of these 10 large health insurance stocks faces risks that are common to any kind of stock. For example, a major economic slump or increased competition could cause any of these stocks to underperform.
All of these stocks (with the notable exception of Health Insurance Innovations) also face what's called an underwriting risk. When health insurers don't accurately estimate the risks linked with providing insurance coverage to specific individuals or groups, they can charge premiums that aren't enough to cover the medical costs incurred.
This underwriting risk could cause health insurers to lose money. For example, several major health insurers reported big losses over the last few years when the premiums charged for individual health plans sold on state Health Insurance Marketplaces weren't high enough to cover medical costs. Investors can usually spot signs of trouble by reviewing health insurers' quarterly earnings updates. When profits drop significantly for a line of business, it's often an indication that the company's premiums aren't enough to cover medical expenses.
Another key risk for these health insurance stocks is the possibility that the U.S. could implement healthcare reforms that negatively impact the health insurance industry. Support has grown for Medicare for All, a program that would expand Medicare to all Americans. Some versions of this program would eliminate or greatly reduce the need for private health insurance in the U.S. This would dramatically impact even health insurers with global operations because the U.S. is by far the largest health insurance market in the world.
The health insurance industry should continue to be a hot area for investors thanks in large part to demographic trends. But if sweeping regulatory changes are introduced, health insurance stocks could become more like a hot potato that no one wants to hold.
Start investing in health insurance stocks
Despite the risks, investing in health insurance stocks could very well be lucrative over the long run. As baby boomers in the U.S. age, Medicare enrollment will increase, with especially strong growth likely in Medicare Advantage plans.
Which of these 10 biggest health insurance stocks is the best choice for investors right now? CVS Health is probably the top pick. The company pays the highest dividend yield (dividends paid as a percentage of share price). CVS Health's pharmacy focus also should enable it to benefit more from the overall increase in demand for healthcare than the others on the list.
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