Managed-Care Stocks React To Private Exchange Talk

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With enrollment for a portion of the country's new health care program set to begin Tuesday, a growing number of employers have begun restructuring their insurance programs to adapt to the pending changes.

Walgreen ( WAG ) said Sept. 18 it would move health coverage for 120,000 of its employees to private health exchanges, where they can choose from a menu of plans.

Earlier in the month,IBM ( IBM ) andTime Warner ( TWX ) announced they would shift their retirees off company-sponsored health plans to private exchanges.

The stocks of many managed-care insurers didn't take the news well. Starting Sept. 17, the group tipped into a three-day slide that trimmed 6% fromUnitedHealth ( UNH ) andAetna ( AET ), and 7% fromWellPoint (WLP) -- the three largest managed-care insurers, measured by market capitalization.

The group recovered a portion of those losses after a series of analyst reports explained the trend is likely to be a net positive for big insurers. But the group has had a good run so far this year -- Aetna was up 40%, WellPoint up 38% and UnitedHealth ahead 33% year-to-date through Thursday.

Goldman Sachs analyst Matthew Borsch noted that the "Big Five" insurers UnitedHealth, WellPoint, Aetna,Cigna (CI) andHumana (HUM) could generate $1 billion a year in added pretax earnings if 13 million people shift to the new model by 2019.

Under the private-exchange model, employers give beneficiaries a lump sum to buy their own coverage. They can shop around. Managed-care firms need to compete for the private-exchange business.

"Some may lose, some may gain," said S&P IQ equity analyst Phillip Seligman in a phone interview.

Public exchanges serve a different purpose. They're designed to provide affordable health coverage to the millions of uninsured Americans. The exchanges are a key part of the Affordable Care Act signed into law in 2010, known as ObamaCare.

The uninsured unable to pay for insurance in the public exchanges will get a subsidy from the government. The exchanges are mostly seen as unprofitable endeavors, at least in the early years, and the fear is that the sickest and neediest will flood state exchanges and place upward pressure on medical costs.

Baby Boomers Meet Medicare

Managed-care companies have other things working in their favor. Health-cost increases have continued to fall as consumers put off or cut back on doctor visits and hospital procedures to keep down their out-of-pocket expenses. The trend has meant insurers don't pay out as much in claims, which increases their profits.

Health insurers' business model is partially based on managing costs through preventive programs and chronic-disease management. They are increasingly applying best practices' clinical-management models to optimize care. They're further tamping down costs through internal cost-cutting and efficiency moves.

In addition, they have been gaining new business from rising enrollments as baby boomers start to sign up for Medicare. Many are choosing the Medicare Advantage option offered by managed-care firms. It's a trend expected to last for years as more members of the 80-million aging cohort retire.

However, recent cuts in government reimbursements to Medicare Advantage plans are a concern, so volume gains are seen as key.

In a recent meeting hosted by Jefferies Group, UnitedHealth CEO Stephen Hemsley said that 65-year-olds are choosing Advantage plans at the highest rate in the program's 10-year history, at nearly 50%.

But Hemsley's near-term view in the face of a 5% rate cut was "more reserved," Jefferies analyst David Windley wrote in a note about the meeting.

In a mid-July conference call, Hemsley said UnitedHealth expected some impact on revenue growth next year due to pressures in Medicare Advantage.

UnitedHealth plans to withdraw some of its Advantage plans in the 2014 fiscal year, affecting 5% of its Advantage membership.

Thanks in some part to its ties with AARP, formerly the American Association of Retired Persons, UnitedHealth has the largest market share in Medicare Advantage, with 21% enrollment share, says Wells Fargo Securities. Humana follows with 16% and Aetna with 6%.

WellCare is gaining share in Medicare's Part D prescription-drug coverage, according to Wells Fargo. But its total market share still trails other insurers.

On the Medicaid side, states are continuing to shift their Medicaid populations to managed care. Meanwhile, ObamaCare expands Medicaid's eligible patient pool.

"Over time (Medicaid) should be profitable as managed-care organizations control the medical cost of this population," said Seligman.

Aetna gained a larger presence in states' Medicaid volume from its big acquisition of Coventry Health Care earlier this year. Other consolidators in the industry over the last two years include WellPoint, which acquired Medicaid-focused Amerigroup in December; and Cigna, which bought Medicare Advantage player HealthSpring in early 2012.

Molina Healthcare (MOH) andWellCare (WCG), both big Medicaid players, are especially benefiting from states' shift of Medicaid patients to managed care, Seligman says.

Molina andCentene (CNC) have a big Medicaid business in Texas, where rates have been going up.

Centene shares are up a whopping 57% so far this year. WellCare has logged a 43% gain and Molina has climbed 33%.

Barclays analyst Joshua Raskin sees additional growth. He wrote recently that rate increases in the Lone Star State are high enough to support his "earnings power thesis" for plans with material exposure to Texas. Rates for the large adult cohort were raised 3.2% for the 2014 year, on top of a 2.1% hike in 2013.

Raskin estimates that Texas accounts for about 36% of revenue for Centene and 19% for Molina.

Public Exchanges On Trial

Public exchanges -- one of the most contentious elements of ObamaCare -- are expected to open for business in January.

Supporters of the plan have enlisted an army of vote-getters to go door-to-door and persuade particularly the young and healthy to sign up when enrollment begins Tuesday. Opponents within the GOP have taken out ads to discourage participation.

"The big question is how many will sign up," said Seligman. A second big question: how many younger, healthier people will sign up to offset higher medical costs from the sickest group, he added.

Another key part of ObamaCare, the employer mandate, was postponed until 2015. Employers with 50 or more workers will be required to provide affordable health coverage to full-time employees who work at least 30 hours a week, or face fines.

Home Depot (HD) and Trader Joe's plan to shift medical coverage for part-time workers to the public exchanges, from limited liability plans.

Big insurers including Aetna, UnitedHealth and WellPoint have opted out of a number of the state-based exchanges, waiting to see whether the number of healthy enrollees is enough to offset the cost of an expected surge of needier patients.

Aetna's CEO Mark Bertolini said in a July 30 conference call that his firm would take a "cautious approach" to public exchanges as it evaluates their longer-term viability.

UnitedHealth, taking a similar approach, "will not be an early mover in the (public) Exchange channel," wrote Windley, adding that management is concerned over low participation and adverse selection in the first two years. The company opted out of California.

Health Net (HNT), on the other hand, looks chiefly to California for growth under ObamaCare, particularly the state's "dual eligible" population, those who qualify for both Medicare and Medicaid.

Susquehanna analyst Chris Rigg upgraded Health Net to positive from neutral on Aug. 25, saying the company was "betting the farm on the ACA." He said the stock could double over the next 12 to 18 months if the ACA works well in the state.

Period of Moderation

Medical inflation is expected to stay at modest levels compared to pre-recession years, at least in the near term, constrained by modest economic growth. PricewaterhouseCooper's Health Research Institute forecasts a 6.5% increase in overall medical costs in 2014.

Annual premiums for employer-sponsored health coverage rose 4% in 2013, also moderate by historical standards, reported the Kaiser Family Foundation in another report.

"We are in a prolonged period of moderation in premiums, which should create some breathing room for the private sector to try to reduce costs without cutting back benefits for workers," Kaiser CEO Drew Altman stated.

The sluggish economic recovery has created a "new normal" in health care spending patterns, the Kaiser report said.

Kaiser said that the ACA will play a role in the slowdown in health-care inflation in 2014 as hospitals work to hold down readmissions or face penalties and employers raise or lower premiums to influence employee behavior.

Meanwhile, enrollment in Medicare Advantage plans is expected to grow in 2014, though it's unclear by how much. Despite predictions of enrollment declines, Advantage enrollment climbed from 11.1 million in 2010 to 14.4 million in 2013, for a 30% gain, Kaiser noted.

UnitedHealth's CEO said during the summer conference call that by 2016 Medicare Advantage will be reimbursed at parity with original fee-for-service Medicare "but will continue to deliver better benefits and lower costs."

Demographic trends are compelling, he said, as more than 3 million people enter Medicare rolls each year.

Meanwhile, private health insurance exchanges may be primed for growth. In a Kaiser survey of more than 2,000 small and large employers, 29% of the largest firms (with at least 5,000 workers) said they are considering offering benefits through a private exchange.

"These jumbo firms employ almost 40% of all covered workers, so their interest could portend a significant shift in the way many people get their health insurance in the future," Kaiser reported.

Aetna plans to take part in about 15 private exchanges in 2014, and is also developing its own private exchange. Such exchanges are now largely set up by third-party consultancies. Other managed-care firms are expected to hop on the private-exchange bandwagon as well.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: AET , IBM , TWX , UNH , WAG

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