Health Insurance: Obamacare Transforming the Industry
The U.S. health insurance industry is undergoing rapid transformation. The change is mostly being brought about by the unending rise in medical costs, price-and service-consciousness among consumers, fierce competition, shift of customer mix, uncertain economic conditions in the U.S. and abroad, and the pressures created by the health care reform law.
The health and medical insurance industry is an integral part of the U.S. economy. According to the Centers for Medicare and Medicaid Services, health expenditures account for approximately 18% of the country's annual gross domestic product. The World Health Organization has stated that health care expenditure per person in the United States is the highest in the world.
Despite the large amount of money spent on health care, the quality of care has been inferior and millions of Americans lacked health insurance coverage or were underinsured. This was mostly due to a dysfunctional system that was in place for several years. To expand coverage, President Obama introduced drastic health care reforms in March 2010, aimed at bringing down the country’s uninsured rate and reining in medical-cost inflation.
Health Care Overhaul
One of the biggest factors that has been changing the face of the health insurance industry is the Patient Protection and Affordable Care Act (:PPACA) which was passed in 2010, marking the start of a multi-year implementation process. It is the most substantial overhaul in the history of the nation's health care system.
The reform was aimed at offering coverage to the 32 million uninsured Americans, affordable health care facilities, expanded coverage for customers with pre-existing health conditions and a check on health insurers.
Significant provisions of the legislation mandated coverage requirements; rebates to policyholders based on minimum benefit ratios; adjustments to Medicare Advantage premiums; establishment of state-based exchanges; greater investment in health IT; annual insurance industry premium-based assessment; reduction in federal assistance on Medicare Advantage; restriction on rescission of policies and elimination of annual as well as lifetime maximum limits. Most of the provisions of the act have come into effect over these years making health insurers jittery.
Despite these changes and the challenges thereof, the industry is thriving. Big players -- CIGNA Corp. (CI), WellPoint Inc. (WLP), Humana Inc. (HUM), Health Net, Inc. (HNT), UnitedHealth Group Inc. (UNH) and Molina Healthcare, Inc. (MOH) -- have reported unfaltering growth in premium, fees and other income since the health care reform was put into effect.
From the period 2010 to 2013, revenues of these insurers, which control a major market share of the private health insurance industry, increased 27% to approximately $284 billion while operating profit increased 10% to $11 billion.
Where's the Industry Headed?
Amid this transition, health insurance plans face both challenges and opportunities, many of which require a shift in business mix. The formation of online exchanges (which became operational last October) and Medicaid expansion are likely to swell the customer base. Then again, the players in the industry face heightened competition from these online exchanges as these have provided customers with comparable shopping options and easy access to information.
Moreover, the industry has opened up to international market which offers significant growth potential in untapped areas. Plus, the industry is expected enjoy diversification benefits as it is branching out into analytics and health services which are complementary to its core business of health insurance.
The industry is also witnessing the formation of alternative forms of care such as Accountable Care Organizations, patient-centered medical homes (:PCMH), and an array of evidence-based and pay-for- performance concepts, because of rising medical costs. These arrangements drive providers such as hospitals and physicians to offer complete care at reasonable costs. Since these arrangements give utmost importance to performance and timeliness, patients receive quality care at affordable prices, and thereby reduce overall medical costs.
Finally, the industry is expected to witness increased use of information technology in the form of electronic records through which “big data” can be used to take informed decisions.
In a nutshell, the potential of the U.S. health insurance industry as a whole will be determined by how quickly and effectively it can address the challenges put forth by health care reform.
Industry Ranking: Overall Positive
Within the Zacks Industry classification, Health Insurance is grouped under the Finance sector (one of the 16 Zacks sectors).
We rank all the 260 plus industries in the 16 Zacks sectors based on the earnings outlook for the constituent companies in each industry. The ranking is available on the Zacks Industry Rank page.
The way to align the ranking and outlook from the complete list of Zacks Industry Rank for the 260+ companies is by considering the outlook for the top one-third of the list (Zacks Industry Rank of #87 and lower) as positive, the middle one-third (Zacks Industry Rank between #89 and #176) as neutral and the bottom one-third (Zacks Industry Rank #174 and higher) as negative.
The health insurance industry features in the top 1/3rd range with a Zacks Industry Rank #61. This indicates that the overall outlook is ‘Positive.'
Please note that the Zacks Rank for stocks, which is the core of our Industry Outlook, have an impressive track record, verified by outside auditors, to foretell stock prices, particularly over the short term (1 to 3 months). The rank, along with Earnings ESP, helps in predicting the probability of earnings surprises.
Earnings Trends
The broader Finance sector, of which the health insurance is part, witnessed an uptick of 0.9% in earnings but a decline of 13.5% in revenues in Q2, mainly due to the weak performance by Banks – Major and Insurance.
However, with the Q3 earnings season progressing, the expectations for this quarter, full-year 2014 and 2015 are in focus.
For the third quarter, the expectation for the broader Finance sector is positive. Total earnings are projected to be up 4.2% year over year with expectations for higher earnings growth of 8.3% in the fourth quarter of 2014 and 14.1% for 2015.
Revenues are expected to be up 0.8% for Q3, down 4.5% for fourth-quarter 2014 and up 3.0% for 2015.
WELLPOINT INC (WLP): Free Stock Analysis Report
CIGNA CORP (CI): Free Stock Analysis Report
HUMANA INC NEW (HUM): Free Stock Analysis Report
MOLINA HLTHCR (MOH): Free Stock Analysis Report
HEALTH NET INC (HNT): Free Stock Analysis Report
UNITEDHEALTH GP (UNH): Free Stock Analysis Report
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