A robust economy and low rates of unemployment are just two of the reasons that the health insurance industry has been on an upswing. After all, as more people are employed, more pay into employer-sponsored health insurance plans.
Better still, the industry has adjusted to the changes prompted by the Affordable Care Act, and generally, ACA plans have been profitable.
A few years ago, investors were deeply concerned that such plans would be a significant drain on health insurers’ bottom line results.
The decision facing today’s investors is whether to buy into health insurance stocks now. Will the industry continue to grow, and if so, which companies stand to offer the greatest rewards for shareholders?
Health Insurance Stocks Pros and Cons
The healthcare industry is always a hot topic.
Keeping care affordable for those who aren’t insured and keeping premiums and out-of-pocket expenses reasonable for those who are is an on-going challenge.
Lawmakers, activities, and industry leaders are constantly in search of solutions that will protect profits without putting American lives at risk.
Efforts to maintain this balance impact shareholder profits, but it can be difficult to determine whether the impact will be positive or negative.
A wide range of factors contribute to individual companies’ results, and trying to make reliable predictions is enough to keeps investors up at night.
However, many continue to put money into healthcare as a whole and health insurance in particular, because one thing is certain: there is always a demand for these services.
Some of the factors impacting health insurance companies include the following:
Strength of the Economy – A strong economy includes low levels of unemployment, which is a pro for health insurers.
Most members are covered through an employer-sponsored plan, so higher employment rates mean a larger, more diverse pool of plan participants.
For the moment, the economic conditions are robust, which is a good sign for current health insurance investors.
However, the downside is that analysts are predicting lower economic growth for 2019 – perhaps under two percent, which is a full point lower than 2018 results.
This figure may be revised downward if the political climate remains uncertain.
Membership Growth – Every insurer relies on attracting and retaining a diverse group of members to ensure profitability.
Low-risk members offset the costs of care for high-risk members.
At present, the number of people covered by health insurance is growing, albeit modestly, which is a pro for insurance company shareholders.
However, as economic growth slows, this trend may reverse, putting insurers’ profits at risk.
Cost of Care – It’s no secret that the cost of healthcare is outpacing income growth and economic growth, which is a top concern for all stakeholders.
For the moment, the rate of increase has slowed somewhat, giving insurers additional time to identify and implement cost containment solutions.
The good news for investors is that the slower rate of rising costs means greater profits for insurers in the short-term.
The bad news is that the issue hasn’t been resolved long-term, and costs could resume their rapid rise.
If you choose to invest in the health insurance industry, there are two critical metrics you should examine before selecting a particular company:
- Ratio of healthcare costs to premiums collected – a lower ratio means more money is coming in than going out
- Year-over-year net income growth – shows whether and how the company is growing over time
Here is how three of the leading insurers stack up.
United Healthcare: Buy or Sell?
When compared to other major players in the health insurance industry, United Healthcare has a distinct advantage.
The company left the ACA marketplace in most areas, so it is open to less risk from potential fallout as adjustments and changes are made to the law.
For example, the Tax Cuts and Jobs Act of 2017 repealed the ACA’s individual mandate, which could have a dramatic impact on the program.
Individuals who are generally healthy – and therefore low-risk – may drop their health insurance to save on premiums.
Fortunately for United’s investors, this doesn’t pose much of a threat to UnitedHealth’s [NYSE: UNH] bottom line results.
With regard to the critical health insurance industry metrics, United is doing quite well.
The company’s ratio of healthcare costs to premiums collected leads the industry at 80.2 percent, and year-over-year net income growth is a solid 26.30 percent.
These figures make United Healthcare [NYSE: UNH] a solid choice for investors who want to buy into the health insurance industry.
What Happened to Aetna?
When it comes to year-over-year net income growth, Aetna is a clear winner.
At the end of third quarter 2018, this figure was a remarkable 38.70 percent. However, investors looking to invest in this health insurer won’t find Aetna listed on any exchange.
As of November 28, 2018, the company merged with CVS Health.
Those who haven’t spent much time on in-depth research into the integrated pharmacy health care services industry may be surprised by this partnership, but according to the combined companies, the whole promises to be much greater than the sum of its parts.
CVS Health [NYSE: CVS] and Aetna leaders expect to create innovative opportunities for members and patients which will, in their words, revolutionize healthcare.
With CVS Health [NYSE: CVS] trading far lower than Aetna’s final per-share cost of $212.70, investors can join the combined companies in reaching their transformative vision for health care delivery at a bargain price.
Should You Invest In Humana?
Humana’s ratio of healthcare costs to premiums collected is slightly higher than United’s, coming in at 82.1 percent.
However, considering the difference in membership demographics, this is actually quite impressive.
Humana [NYSE: HUM] primarily serves Medicare members, which is a growing population.
With all indications pointing to Americans living longer, healthier lives, this bodes well for Humana’s long-term prospects.
As of third quarter 2018, Humana’s year-over-year net income growth is lower than most of its peers at 10.90 percent, but that is not unexpected when considering its large proportion of Medicare members.
Perhaps the most interesting thing about Humana is its apparent interest in expanding its business model.
The company recently decided to acquire certain portions of Kindred Health, a senior housing company.
Possibilities for creating a stronger, more integrated patient experience while simultaneously keeping costs low makes this bold move rather intriguing for investors.
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