How Obamacare Guarantees Healthcare Profits

obamacareLike most states, my home state, Colorado, is suffering through the convulsions of implementing the diktats of the Affordable Care Act, or Obamacare.
Last November, the Colorado Division of Insurance reported that nearly 250,000 policies were canceled because they failed to provide sufficient mandated coverage.  Ninety-five percent of these cancellations included offers for a new policy, but anecdotal accounts point to new policies encumbered with higher deductibles or higher out-of-pocket costs.  I imagine what’s occurring in Colorado is little different from what’s occurring in most states.
My initial impression was that Obamacare was bad news for private healthcare insurers.  Despite penalties associated with foregoing healthcare insurance, many younger people would prefer to pay a penalty than to buy expensive insurance they were unlikely to use. This would leave the insurers with an unhealthy level of older and sickly policyholders.
I need to rethink my supposition. Contrary to being devastated, large healthcare insurers have thrived, offering some of the best market returns over the past 12 months.

Healthcare Insurer

12-Month Share-Price Appreciation

Cigna Corp. (NYSE: CI)


Aetna Inc. (NYSE: AET)


WellCare Health Plans Inc. (NYSE: WCG)


WellPoint Inc. (NYSE: WLP)


Humana Inc. (NYSE: HUM)


UnitedHealth Group (NYSE: UNH)


S&P 500 Index


Lack of income also prejudiced me against these insurance stocks. Most are low yield, but a few have morphed into respectable dividend growers: Since 2011, UnitedHealth Group has increased its quarterly dividend 124%, WellPoint 52%, Aetna 50%.
To be sure, it’s still possible healthcare costs will explode, but that doesn’t mean the insurers will suffer the consequences.  In all likelihood, you and I will.

The Reality of Healthcare Profits

A respected health insurance consultant, Robert Laszewski, reveals two obscure provisions in Obamacare that provide subsidies and bailouts financed by taxpayers.
The first is the Reinsurance Program, which caps claims for insurers offering individual plans. Insurers pay for claims up to $45,000, while the federal government picks up 80% of the costs exceeding $45,000 up to a maximum of $250,000.
The second is the Risk Corridor Program, which limits total losses. If a plan’s costs exceed 103%, but not more than 108% of the health plan’s targeted amount for a year, the federal government will reimburse 50% of all costs in excess of 103% of the target. If a plan’s costs are more than 108% of the annual target, the feds will first pay a flat 2.5% of the target and then reimburse the plan for 80% of claim costs above the targeted amount––with no upside limit.
It’s all obfuscating, confounding stuff –a godsend to politicians. The bottom line is that you and I are the guarantors, whether we like it or not. Joseph Salerno, finance and economics professor at Pace University, estimates taxpayers would be on the hook for 75% to 80% of a health insurer’s underwriting loss.
Depending on which side of the political aisle you reside, you might love the implications of Obamacare or you might hate them.  But as an investor you have to trade in reality and be aware of these healthcare profits.
Obamacare is the reality, and part of that reality is that large healthcare insurers have been elevated to the level of Wall Street banks – politically unfeasible to fail.  Any investment stamped with the fed’s seal of approval is an investment worth a closer look.  I’ll be looking closer at healthcare insurers and healthcare profits over the course of the year; perhaps you should do the same.

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