About the Industry
The Zacks HMO industry consists of entities (either private or public) that take care of subscribers’ basic and supplemental health services. Players in this space primarily assume risks and assign health and medical insurance policy premiums. Industry participants also provide administrative and managed-care services for self-funded insurance. Services are generally offered via a network of approved care providers (called in-network), which include primary care physicians, clinical facilities, hospitals and specialists. However, out-of-network exceptions are made during emergencies or when it is medically necessary. Health insurance plans can be availed through private purchases, social insurance or social welfare programs.
4 Trends Shaping the Future of the HMO Industry
Steady Membership Base: Industry players develop cost-effective health insurance plans with attractive features to enhance their appeal and differentiate themselves from competitors. By offering these plans to various U.S. communities, health insurers gain a growing membership base, ensuring a consistent flow of premiums — the primary revenue source for any health insurer. The appeal of these plans also leads to numerous contract wins and renewals with federal or state authorities, further expanding the customer base. However, the Medicaid business of most health insurers suffered a setback due to the redetermination process that officially commenced on Apr 1, 2023. Nevertheless, a diverse set of plans distributed by industry participants is likely to partially offset the Medicaid membership losses suffered by the industry participants.
An Aging U.S. Population: Medicare plans are designed to serve individuals aged 65 and above. A greying senior population, resulting from the aging of the baby boomer generation and the increase in life expectancy, is likely to sustain strong demand for these plans in the future. Industry participants can leverage Medicare plans to attract more members from the rapidly-growing senior population, expanding their customer base and earning a continual flow of premiums. They collaborate with a vast network of healthcare providers, including physician groups, hospitals, ancillary providers and pharmacies, to offer quality care services to this medically vulnerable group. Some health insurers even operate senior-focused centers to deliver quality care services to the aging population.
Technological Advancements: The HMO industry is heavily investing in the development of virtual healthcare solutions, commonly known as telehealth services, to embrace the digitization trend permeating all aspects of healthcare. The use of chatbots, AI-based voice assistants, mobile apps, robots, cloud computing and analytics allows patients to receive care from the comfort of their homes, reducing the strain on the U.S. healthcare system caused by frequent patient admissions. These technologies enhance operational efficiencies and lower costs for industry participants. Although tech investments may initially increase costs for health insurers, enhanced technologies enable uninterrupted revenue streams for them and shield them from adversities inflicted by sophisticated forms of cyberattacks.
An Active M&A Strategy: Health insurers pursue mergers and acquisitions (M&A) to enhance their product and service portfolios, attracting more members. These initiatives aim to expand global presence and offer diversification benefits, crucial for strengthening market position. The Federal Reserve decided to maintain its benchmark interest rate at its latest policy meeting, with no rate changes since the beginning of 2024 after 11 hikes in 2022 and 2023. Steady interest rates may encourage more industry participants to opt for loans to enter M&A deals and avoid the complete exhaustion of cash reserves.
Zacks Industry Rank Instills Optimism
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all-member stocks, indicates bright near-term prospects. The Zacks Medical-HMOs industry, which is housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #105, which places it in the top 42% of more than 250 Zacks industries.
Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate.
Before we present a few stocks you may want to buy or retain in your portfolio, let’s look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms Sector But Lags S&P 500
The Zacks Medical-HMO industry has outperformed the Medical sector but fell short of the Zacks S&P 500 composite in the past year.
In the said time frame, the industry has gained 6.7% compared with the Medical sector’s growth of 4.9%. The Zacks S&P 500 composite has risen 22.3% in the same time frame.
One-Year Price Performance
Image Source: Zacks Investment Research
Industry's Current Valuation
Based on the forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing medical stocks, the industry trades at 16.2X compared with the S&P 500’s 21.71X and the sector’s 23.51X.
Over the past five years, the industry has traded as high as 19.57X and as low as 11.79X, with the median being at 16.06X, as the chart below shows.
Forward 12-Month Price/Earnings (P/E) Ratio
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
3 Stocks to Keep a Close Eye On
We present three stocks from the space, either carrying a Zacks Rank #2 (Buy) or #3 (Hold). Considering the current industry scenario, it might be prudent for investors to buy or retain these stocks in their portfolio, as these are well-placed to generate growth in the long haul.
Cigna: The Connecticut-based company continues to benefit from the robust performance of its two growth platforms, Evernorth and Cigna Healthcare. The Evernorth platform is bolstered by a comprehensive suite of specialty pharmacy services, while Cigna Healthcare benefits from a broad customer base in its U.S. Government and U.S. Commercial businesses. This Zacks Rank #2 health insurer continually expands its product offerings and enhances its growth through acquisitions and partnerships with prominent healthcare systems.
The Zacks Consensus Estimate for Cigna’s 2024 earnings is pegged at $28.48 per share, suggesting 13.5% growth from the prior-year reported figure. CI’s earnings outpaced estimates in each of the last four quarters, the average being 3.29%.
Price & Consensus: CI
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for UnitedHealth Group’s 2024 earnings is pegged at $27.68 per share, indicating a 10.2% rise from the year-ago reported figure. UNH’s earnings beat estimates in each of the last four quarters, the average being 3.28%.
Price & Consensus: UNH
Image Source: Zacks Investment Research
Centene: Based in Missouri, Centene's revenues are bolstered by robust performance in its Medicare and Medicaid businesses, resulting in multiple contract wins and membership growth. The aging U.S. population continues to favor Medicare Advantage plans. This Zacks Rank #3 health insurer leverages an inorganic growth strategy through acquisitions and provider collaborations.
The Zacks Consensus Estimate for Centene’s 2024 earnings is pegged at $6.73 per share, which suggests a 0.8% rise from the year-ago reported figure. CNC’s earnings outpaced estimates in each of the last four quarters, the average being 10.45%.
Price & Consensus: CNC
Image Source: Zacks Investment Research
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See Stocks Now >>UnitedHealth Group Incorporated (UNH) : Free Stock Analysis Report
Cigna Group (CI) : Free Stock Analysis Report
Centene Corporation (CNC) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
