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One of the schools of thought after Obamacare was passed was that health insurance stocks would enjoy big windfalls. The theory was that since everyone had to be insured, obviously the insurers would pick up a lot of business.
That hasn’t totally come to pass, since enrollment has been far below expectations. Yes, there are still lots of people coming on board, but it wasn’t tens of millions as promised.
There’s been another hiccup in the whole process, which some observers have said is not at all unexpected. Individuals who couldn’t get health insurance before, because they suffered from long-term problems, ran to get into the Obamacare exchanges so they could finally be covered.
Of course, that meant that they would pay into the insurers premium pots, but it also meant the insurers would pay a lot on claims. Meanwhile, the healthy people who don’t buy policies instead pay the fine.
Bad News in Guidance
As a result, UnitedHealth Group (NYSE: UNH) hit the market with some bad news last week. The company said earnings would get hit by $425 million because its exchange product was not doing very well. In fact, UnitedHealth Group said it was losing money for exactly the reasons stated above and said it might withdraw from the Obamacare exchanges entirely by 2017.
So the market freaked out and sold off all the insurers because, hey, if this big, experienced insurer is losing money, everyone else must be, also. If that happens, investors feared, then maybe the predicted death spiral of Obamacare would also happen. That is, more and more people sign up, more and more claims get paid, the insurers lose money, and the government has to bail them out.
It could happen.
However, it appears that UnitedHealth may have simply messed up with its actuarial calculations, because one would have expected them to expect this very problem.
In fact, the trouble is not just actuarial. It’s also trying to predict just how many people might sign up, in what states, in what counties, what kinds of illnesses they have, and what to charge everyone. Remember, premiums have to be uniform at each level of care, so whether you suffer from acute issue or chronic ones, the “gold” or “platinum” or whatever level care will cost the same, all other things being equal.
So UnitedHealth sold off about $8 on the news, but has recovered. Is this so bad that shorting health insurers makes sense? I don’t think so because not all insurers are alike. While many smaller insurers have had to close down, other larger ones are doing well.
Other Health Insurance Stocks
Molina Healthcare (NYSE: MOH) is doing fine. The reason is diversification. It hasn’t put all its eggs in the exchanges. It is primarily a government health insurer, as well as a Medicaid insurer. It also doesn’t have more than a quarter million people in the exchanges and and it is making money there.
Then we have big players like Aetna (NYSE: AET) and Anthem (NYSE: ANTM). Each company said it would meet its guided earnings expectations for the year. Aetna plans to pull out of smaller state exchanges, and raise premiums pretty significantly next year. So that suggests the company isn’t really making much money.
As for UnitedHealth, it is incredibly diversified with many different segments. The stock trades at 17.9 times this year’s estimates and 15.9 times 2016 estimates. Growth is pegged at around 14%, so it actually may be worth looking at.
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