Like 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
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
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.
12-Month Share-Price Appreciation
|Cigna Corp. (
|Aetna Inc. (
|WellCare Health Plans Inc. (
|WellPoint Inc. (
|Humana Inc. (
|UnitedHealth Group (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
: 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,
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
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
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.