There are some things I just don’t get. Bungee jumping, the Ruta de los Conquistadores, body piercing are near the top of the list, just under equity investors’ reactions to health reform.
And it doesn’t look like my health investor puzzlement is going to end any time soon.
Several news items collided in my inbox this week; passage of the House reform bill and multiple analyses thereof; a report that health plans’ medical costs and profitability are worsening, yet many health plan stocks are selling close to their 52-week highs. Huh?
Let’s start with the health plan medical cost report. The good folks at Mark Farrah and Associates published an analysis that, among other things, noted:
– the top eight health plans (covering 59% of the nation’s total insureds) lost 836,000 members in the first half of 2009
– commercial membership was down 1.45 million while MA and Medicare Supplement was up 405,000
– Medical costs are trending higher, and medical loss ratios are as well
The net – profitability has declined, costs are increasing, and membership is dropping. Yikes.
Now, investors don’t seem too worried about these trends. In fact, as of this morning, they seemed to be enamored with the health plan sector as stock prices are up over nine percent over the last month, compared to an S&P that’s just over flat.
Next, health reform and the recent House and Senate bills. What I see that’s scary is the lack of a strong mandate coupled with an end to most underwriting of medical coverage means people can sign up for health insurance when they need it, stop paying premiums when their care is completed, and then re-up if and when they need care again.
Let’s call this the Massachusetts Problem, after what’s been happening to health plans there.
This isn’t conjecture or theory. It’s reality, and it is taking place in a market with a much stronger mandate than the one in the Senate Finance bill.
Finally, a few selected statements from stock analyst types:
– “There were two recent developments of particular concern to WellPoint investors, since the company is a relatively big player in the small-employer and individual markets. First, the Senate Finance Bill included strict insurance market reforms but a weak individual mandate, which could lead to adverse selection, higher premiums, and a smaller market for individual and small-group policies.” (Morningstar) Yet Morningstar rates WellPoint a five-star stock
– They also may not be hurt as badly by a federal health care overhaul as many analysts first worried. Congress is debating ways to cover the uninsured and reduce costs, and health insurance stocks have been sensitive to this debate for months. Shares sank at the start of the year when the reform debate picked up steam, but they have recovered for the most part as the threat of a strong public option that would compete with insurers faded. A possible tax on insurers based on their market share remains a concern. But overall, analysts say the sector remains on sound footing heading into the next few quarters. [notice no discussion of the impact of the end of underwriting coupled with a weak or nonexistent mandate…perhaps it was edited out] istockanalyst
– “I think they’re getting a really bad shake in the current environment,” FTN Equity Capital Markets analyst Peter Costa said. “But the core businesses are there.” istockanalyst
United Healthcare is also a top rated stock, and is trading near its 52-week high.
Analysts may say health plans are somewhat insulated from the individual market, where the underwriting issue is really problematic. True, but as more companies drop their group plans (a multi-year trend that has accelerated this year), the size of the individual market will grow – and health plans will have to get into or expand their offerings in that market if they are going to increase revenues (a mandatory requirement for publicly traded companies).
So here’s where this all leads. Without a strong individual mandate, health plans are going to lose buckets of money insuring people after they get sick. How that translates into a 52-week high is beyond me.
Disclosure – I’ve sold all my health plan stock holdings and don’t have any financial interest whatsoever in the sector. Not because I don’t think there are some good companies out there in the healthplan business (Aetna’s probably at the top of the list), but because provisions in the two health reform bills will kill off the entire industry.
Nov
12
A couple of things to consider.
1.) Most of the stocks are currently trading at less than 8x next year’s earnings. The market has already discounted a lot of the things that you mention, like the tougher fundamental environment, and the risks of reform. Keep in mind that earlier this year, the market thought there was a real risk the insurers would be put out of business by reform, so as it has become clear that’s not the case, the stock prices have improved.
2.) Most of the changes proposed reform won’t occur until 2013 or 2014. That’s a long way off. Many of these plans will generate more cash before any of the reform initiatives are implemented than they have in market cap today. So once there is clarity on reform, and everyone can figure out a reasonable worst case scenario, stock prices will improve further because these companies generate so much cash, even in the more difficult fundamental environment that you reference.
Why A Strong Public Option Is Essential – By jacksmith – Working Class
It’s not just because more than two thirds of the American people want a single payer health care system. And if they cant have a single payer system 77% of all Americans want a strong government-run public option on day one (86% of democrats, 75% of independents, and 72% republicans). Basically everyone.
It’s not just because according to a new AARP POLL: 86 percent of seniors want universal healthcare security for All, including 93% of Democrats, 87% of Independents, and 78% of Republicans. With 79% of seniors supporting creating a new strong Government-run public option plan, available immediately. Including 89% of Democrats, 80% of Independents, and 61% of Republicans, STUNNING!!
It’s not just because it will lower cost. Because a strong public option will dramatically lower cost for everyone. And dramatically improved the quality of care everyone receives in America and around the World. Rich, middle class, and poor a like.
It’s not just because it will save trillions of dollars and prevent the needless deaths of millions more of YOU, caused by a rush to profit by the DISGRACEFUL, GREED DRIVEN, PRIVATE FOR PROFIT MEDICAL INDUSTRIAL COMPLEX!
It’s not just because every expert in every field, including economist, and Nobel laureates all agree that free market based healthcare systems don’t work. Never have and never will. The US has the only truly free market based healthcare system in the World. And as you all know now, IT IS A DISASTER!
It’s not just because providing or denying medically necessary care for profit motivations is wrong. Because it is WRONG! It’s professionally, ethically, and morally REPUGNANT!, Animalistic, VILE and EVIL.
THE REASON THE PUBLIC OPTION IS ESSENTIAL:
The public option is ESSENTIAL because over 200 million of you are trapped in the forest of the wolves. Which is the forest of the DISGRACEFUL, GREED DRIVEN, PRIVATE FOR PROFIT MEDICAL INDUSTRIAL COMPLEX! With no way out except through needless inhumane suffering, and DEATH. While the wolves tear at your flesh, and rip you limb from lib. Then feast on your lifeless bodies like a dead carcase for transplant parts.
At the most vulnerable times of your lives (when you were sick and hurting), millions of you have had to fight and loose cruel, but heroic battles. Fighting against the big guns of the DISGRACEFUL, GREED DRIVEN, PRIVATE FOR PROFIT MEDICAL INDUSTRIAL COMPLEX! in the forest of the wolves. All because you have no place else to go. You have no other CHOICE!
But the PUBLIC OPTION will give you someplace safe to go. And it will give us someplace safe to take you. The public option will be your refugium (your refuge). Where the wolves cannot get at you when your down, hurting, and vulnerable. Where everyone who needs it can find rest, security, comfort and the care they need. Protected by the BIG GUNS of We The People Of The United States. THE MOST POWERFUL PEOPLE AND COUNTRY ON EARTH.
This is why it is so critical that we do not lead another 50 million vulnerable, uninsured Americans into the forest of the wolves, without the protections of a Strong Government-run MEDICARE like public option. We The People Of The United States MUST NOT LET THAT HAPPEN to any more of our fellow Americans. If healthcare reform does not contain a strong MEDICARE like public option on day one. YOU MUST! KILL IT. Or you will do far more harm than good. And millions more will die needlessly. Rich, middle class, and poor a like.
To those who would continue to obstruct good and true healthcare reform for the American people, and who seek to trap millions more vulnerable Americans in the forest of the wolves. We will continue to fight you. We are prepared to wage all out war against you, and will eagerly DESTROY! you. Time…is…UP! YOU HAVE BEEN WARNED! No Co-op’s! No Triggers! NO INDIVIDUAL MANDATES! without a Strong MEDICARE like public option on day one.
Anon –
not to quibble, but the current PE for most is over 10, and given the industry’s recent inability to deliver on its forecast, I’m leery of a multiple based on forecast. 10+ just seems high to me given the risk.
I’d disagree with your statement “market thought there was a real risk the insurers would be put out of business by reform, so as it has become clear that’s not the case,”; the point of the post is my contention that reform as currently defined in the House and Senate bills WILL put them out of business, albeit over time.
Re the timing of underwriting changes, there are significant differences between the various bills and given AHIP’s image issues on the Hill I would not be surprised if they took a hit bigger and earlier than expected.
Your point on cash generation is a good one, and that may be their savior. I’d note that current trends have them spending more than they thought due to higher MLRs. If they don’t address the MLR issue the cash may not be sufficient.
Paduda
you should try bungee jumping…its a lot less dangerous and more fun than health reform
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