Obamacare Beneficiaries: Health Insurance Stocks

obamacare-stocksIt was like a starting gun to a race…
Once the Supreme Court essentially ruled that Obamacare – aka the Affordable Care Act – was here to stay, the race was on for already-big health insurance companies to growth even larger.
The “big five” health insurers will soon officially become thebig three” in this wave of consolidation.
The new big three are: UnitedHealth Group (NYSE: UNH), the recently announced marriage between Anthem (NYSE: ANTM) and Cigna (NYSE: CI), and the previously proposed joining of Aetna (NYSE: AET) and Humana (NYSE: HUM).
These three companies will have more than 134 million customers, and combined annual revenues of $346 billion. Each company will generate more than $100 billion in revenues!
The health insurance industry is hardly alone in feeling the effects of Obamacare.
Hospital companies, pharmacy management companies and pharmaceutical firms have grown larger too. In fact, the pharmacy management sector is also down to a “big three” – Express Scripts (NASDAQ: ESRX), CVS Health (NYSE: CVS) and UnitedHealth. The latter is buying Catamaran (NASDAQ: CTRX) and folding it into its Optum unit.

Medicaid, Medicare Changes

Obamacare has been like manna from heaven for the health insurance companies.
First, it expanded Medicaid. That brought in millions of previously uninsured people into private health plans for the first time ever.
Second, it also is pushing Medicare toward becoming more privatized. Millions of seniors now bundle their Medicare with prescription drug or dental and vision coverage.
Nearly one in three retirees – almost 17 million people – are now enrolled in Medicare Advantage plans. That is up substantially from before Obamacare, when the figure stood at about 10.5 million. And it’s expected to jump to 22 million by the end of the decade.

Strings Attached

However, Obamacare comes with government strings attached – namely how much profit per person that health insurance companies can make.
So to grow your profits, you need to do two things.
Get bigger through more customers,  and improve your profit margins by scale. In other words, getting bigger in size and achieving lower cost ratios through cost-cutting.
Despite the government strings, these companies are flourishing and will continue to do so with even greater size. Both UnitedHealth and Anthem, for instance, recently announced better-than-expected revenues and earnings.

Don’t Forget the Little Guys

To me, this means that stocks of all of the big three companies remain buys.
But don’t forget the smaller health insurance stocks. Consolidation is happening there too.
Centene (NYSE: CNC) announced in early July a $6.2 billion deal to buy Health Net (NYSE: HNT). Other smaller players include WellCare Health Plans (NYSE: WCG) and Molina Healthcare (NYSE: MOH).
Any of these companies can become a tasty morsel for the hungry “big three.”

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