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Will Heathcare Stocks Get a Boost After Recent Poll? - Analyst Blog

Zacks Equity Research

A recent Gallup and Healthways study revealed that the Health Care Reform Act signed by President Obama on Mar 23, 2010, has achieved its primary objective of roping in a higher number of Americans under the insurance net.

The recent poll results of the survey brings to light an 11.9% decline in the uninsured rate among U.S. adults for 1Q15, down 1% sequentially and 5.2% since the end of 2013 – just before the Affordable Care Act (ACA) went into effect. The uninsured rate is the lowest since Gallup and Healthways began tracking it in 2008.

Behind the ACA Wave

It was not until the law’s individual mandate provision, which required that every individual should carry a health insurance, was effective on Jan 1, 2014, that the uninsured rate started seeing a secular decline. Prior to that the uninsured rate jumped from around 14% in early 2008 to over 17% in 2011, and reached a high of around 18.0% in the third quarter of 2013. At this point, there is no denying the fact that the ACA as a whole is a sweeping success.

Another key accomplishment of the reform is its success in penetrating those layers of the American population which it specifically targeted. These were the lower-income Americans and Hispanics, who were tagged as the groups that lacked insurance the most. In an event of illness, these groups would leave billions in unpaid hospitals bills, and some of these costs indirectly passed onto the average taxpayer with insurance.

The uninsured rate among Americans earning less than $36,000 in annual household income dropped 8.7% points since the end of 2013, while the rate among Hispanics fell 8.3 points. Despite this progress, a lot more remains to be done as this group still tops the uninsured list.

Public Exchanges and Medicaid Expansion Acting as Catalyst

The decline in the uninsured rate has been brought about by the public exchanges which debuted in Oct 2013. After initial technology glitches, the public exchanges took off to a smooth flight. These exchanges have seen two open enrollment periods so far.

An open enrollment period is when individuals can enroll in a health insurance. The results of the first open enrollment period showed that more than 15 million Americans got health insurance. The second open enrollment period also came up with sanguine results from Nov 15, 2014 to Feb 15, 2015, which was extended for six weeks from Mar 15 to Apr 30. This enabled an even larger population to buy insurance coverage than what was originally estimated.

Players are optimistic about public exchange business. Aetna Inc. AET said that it enrolled 600,000 members across 17 exchanges in 2014, accounting for nearly 5% of its 2014 operating revenues. The company projects solid growth in public exchange business in 2015, too. UnitedHealth Group Inc. UNH is aggressively expanding its participation in exchanges in 2015, boosting the number of its markets from six in 2014 to about two dozen in 2015.

Another major catalyst that has drilled down the uninsured rate and created significant business opportunity for insurers operating Medicaid managed care plans is Medicaid Expansion – one of the biggest milestones in health care reform. Medicaid expansion takes Medicaid eligibility to all individuals and families below the 138% Federal Poverty Level.  Medicaid enrollment is not bound by the open enrollment period, which allows the uninsured to sign up throughout the year.  

Medicaid expansion became effective in 2014 and brought billions of dollars in revenues for managed-care plans by Aetna, Centene Corp. CNC, Humana Inc. HUM, Anthem Inc. ANTM and also saw significant membership growth in this line of business. UnitedHealth also expects revenues from the Medicaid market to grow by 15% to 17% in 2015.

Insurers’ Prospects Brighten

Obamacare has encountered much criticism and lobbying by the health insurers. And now after half a decade of living with the law, health insurers find themselves net gainers from the reform, they once opposed vehemently.

Despite certain misgivings, the increase in the number of enrollments is good news for insurers. Big players – Cigna Corp. CI, Anthem, Humana, Health Net, Inc. HNT, UnitedHealth Group, Molina Healthcare Inc. MOH, and Centene -- have reported unfaltering growth in premium, fees and other income since the health care reform was put into effect.

From the period 2010 to 2014, revenues of these insurers, which control a major market share of the private health insurance industry, increased 45% to approximately $375 billion while operating profit increased 65% to $21 billion.

The share price gains of most of the insurers also tell the same growth story. Ever since the ACA was signed into a law on Mar 23, 2010, share prices of UnitedHealth, Humana Inc., Cigna and Molina Healthcare have increased nearly four times. In comparison, the S&P 500 has risen around 78%.

Evolving Relationship

It is noteworthy that over time, the relationship between the government and the insurance industry has become symbiotic in nature. This has become crucial to the success of the country’s biggest healthcare plans.

Health insurers have provided the administration with assistance during several litigations over the ACA. In 2013, UnitedHealth Group had assisted in the repair of the enrollment website following its crash during the initial days of its rollout.

Bottom Line

Obamacare’s success has resulted in gains for insurers and the insured alike. Stocks of insurance companies are set to gain further going forward. This is why adding them to one’s investment portfolio would make for a prudent choice.

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ANTHEM INC (ANTM): Free Stock Analysis Report
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