Will health care law hurt insurers' profits?

Obamacare may not be as good for insurance companies as some people seem to think.

By Stock Traders Daily Nov 14, 2012 12:43PM

Doctor sitting in office with patient talking and smiling copyright Paul Bradbury, OJO Images, Getty ImagesBy Barry S. Cohen, Stock Traders Daily


Now that President Obama has been reelected, the 2010 Affordable Care Act is here to stay. And the biggest change to the U.S. health care system since the implementation of Medicare and Medicaid in 1965 may signal tougher sledding for health care insurers.


That could be bad news for the largest U.S. medical insurer, UnitedHealth (UNH), as well as other big industry players Aetna (AET), Wellpoint (WLP), Cigna (CI) and Humana (HUM). 

These companies could be facing profit limits and new taxes to cover some of the cost of expanding health care coverage to as many as 30 million uninsured people starting in 2014. So how do investors trade these stocks? 


ObamaCare, as it's become known, imposes fees and restrictions on insurers, and it cuts funding for Medicare Advantage, the privately run version of the government's Medicare program for the elderly and disabled. These changes are troublesome to investors, and some also are worried that insurers will be stuck with skinnier profit margins from the business they gain via new online exchanges that will be set up to help people buy coverage, the Associated Press reported.


However, a couple of analysts see the glass as half full when it comes to the stocks of the health insurers. Bernstein's Ana Gupte said in a recent research note that the risk of thin profits in the commercial business is manageable and already priced into company stocks, according to the AP story. She added that Medicare and the state-federal Medicaid program for the needy and disabled represent attractive growth opportunities for insurers. Among her favorite picks are Aetna, Humana and UnitedHealth.


In the same story, Citi analyst Carl McDonald said in a note that the overhaul is already cutting funding for Medicare Advantage plans, and he doesn't think the program will see additional cuts. Even if they do happen, McDonald said that doesn't necessarily hurt profitability.


At least one health insurance executive agreed that the election changes nothing for his company. Mark Bertolini, Aetna CEO told Bloomberg that Obama's victory makes the game plan the third-biggest U.S. health plan by enrollment has been executing "one we can stick with."


Among health insurers, two smaller companies that may prosper from the health-care law are St. Louis-based Centene Corp. (CNC) and WellCare Health Plans (WCG), headquartered in Tampa, Fla. Both companies focus largely on Medicaid, the joint state- federal program for the poor. The health law expands the system, accounting for half of the new people to be covered. As a result many cash-strapped states are likely to turn to private contractors like Centene and WellCare to handle much of the growth. 

For more information about stocks in this space, Stock Traders Daily's real time trading reports help investors identify opportunities before they happen.



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