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4 HMOs Likely to Cruise Ahead of Industry in 2019

With an estimated 85 million people representing more than $1 trillion in annual health care spending still not served through managed care in the United States alone, players in the HMO industry are well positioned for continued growth. New markets continue to emerge around areas like social determinants, specialty and supplemental coverage, and global opportunities which should create business opportunities in 2019 and beyond.

Recently, a federal court judge in the state of Texas declared the Individual Mandate clause in the Affordable Care Act (ACA or Obamacare) unconstitutional, thus challenging the constitutionality of the ACA overall. This decision, which is being repealed by more than a dozen states, will cast uncertainty over the viability of the ACA.  The ACA, which was enacted in 2010, led to a decline in the uninsured population thus aiding the earnings of the HMO players. Repealing or holding the Individual mandate unconstitutional will be like breaking the backbone of the ACA. This might lead to an increase in uninsured population and soaring of health insurance premiums.

Nevertheless, the recent ruling by the federal judge is not very disappointing since this is the initial step of a likely lengthy appeals process. One of the health insurers, Molina Healthcare said, regardless, the ACA will remain in effect for 2019, and we are optimistic that it will remain in effect thereafter.

Brokerage Evercore ISI said it expected no immediate impact from the ruling, calling it only a declaratory judgment and not an injunction.

Keeping this in mind, let’s see the likely factors affecting the industry in 2019.

In 2019 and beyond, players should see potential for sustained growth across the markets, particularly in expanding government programs.  With more baby boomers reaching retirement age, the number of people eligible for Medicare is projected to reach 72 million by 2025, up from about 63 million at present, with gross spending for Medicare expected to surpass $1.2 trillion by 2025, up from more than $800 billion projected for 2019. Medicare Advantage continues to be a popular choice, now serving more than one-third of those enrolled in Medicare. Players like UnitedHealth, Anthem and Humana are positioned for strong growth as the Medicare Advantage market continues to expand and evolve.

Another government business, Medicaid should continue to grow as states continue to expand coverage and as traditional fee for-service offerings move to managed care. Medicaid players in the industry should witness continued intense competition in Request for Proposals (RFP) in 2019 and beyond. The dependence of states on innovation and fiscal discipline of managed care has resulted in increased RFP activity, as states are vying options to provide health care coverage to as many people as possible in effective ways.

Business combinations will continue to be one of the many ways that players should improve their capacities to serve more people in more geographies as well as continue to diversify business and achieve scale and service efficiencies.

The Health Insurer Tax (HIT) deferral combined with CMS rates for 2019 resulted in meaningful benefit investments from most managed care organizations. This should lead to Medicare Advantage expasion in 2019.

Players in the HMO industry expect utilization of services to increase at a consistent rate in 2019. They should continue to mitigate medical cost increases with their medical management strategies, further adoption of value-based reimbursement and advancements in consumer decision-making due to their use of market-leading engagement tools.

Other than these, investment in technological investment and upgrade, application of blockchain technology, growth of new business units, international expansion, better claims handling, medical cost management, mergers and acquisitions, and healthy balance sheets should fuel overall growth of the industry.

The stabilization of health insurance exchanges is another positive. Administrative actions (such as encouraging people to maintain continuous coverage and attracting younger and healthier people to join the market) taken last year by the CMS  have paid off as the some of the players that exited the health insurance exchanges in many markets in 2016 and 2017 have now returned to markets. Some of the returning companies are Anthem, Wellmark, Molina and Cigna.

The Medical-HMO industry has gained 19.41% year to date compared with the Zacks S&P 500 Composite decline of 2.7%.

 

The HMO industry is slated for another good ride in 2019 and therefore picking some good stocks from this space should be a good investment move. Each of these stocks has witnessed an upward revision in earnings estimates for 2019 and carries a strong Zacks Rank.

Our Picks

Anthem, Inc. ANTM operates as a health benefits company in the United States. The company should see top-line growth from an increase in enrollment in Medicare Advantage plans. A strong balance sheet with positive cash flows should help it to invest in growth.

The company currently has a Zacks Rank #2 and Value Style Score of A. The Zacks Consensus Estimate for 2019 earnings has moved up by 2.9% in the last 60 days.

Humana Inc. HUM should gain from its growing Medicare business, as the same is in high demand from the retiring baby boomer population. Also, its health services business provides diversification benefits. The company currently has a Zacks Rank #2 and Value Style Score of A. The Zacks Consensus Estimate for its 2019 earnings has moved up 1% in the last 60 days.

Cigna Corp. CI is a health benefits company and its acquisition of Express Scripts, a pharmacy benefits manger (due to be closed this month), bodes well for long-term growth, which will help it to expand vertically. The company currently has a Zacks Rank #1 and Value Style Score of B. The Zacks Consensus Estimate for its 2019 earnings has moved up 3.1%, in the last seven days.

Molina Healthcare, Inc. MOH deals mainly in government-related plans such as Medicaid and is expected to gain from Medicaid expansion. The company currently has a Zacks Rank #1 and Value Score of B. The Zacks Consensus Estimate for 2019 earnings has moved up by 31.3%, respectively, in the last 60 days.
 

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