Health Insurers Gain Under Obamacare

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After a choppy ride, the health insurance industry is finally on the growth path. Though initially criticized by the industry, the health care reform has turned out to be beneficial to industry players. Courtesy of Obamacare, the players have witnessed meaningful gains in their membership enrollments.

Now, after more than five years of sharing the space with Obamacare, the insurers have embraced the law and also gave technical assistance to the government when the public exchange suffered glitches at its debut.

Most of the players are now looking for newer avenues to expand their business. They are reassessing the entire business model from the perspective of product, pricing, risk management, distribution and claims to fraud management for a realistic pace of growth.

The trend of share price movement of the biggest four health insurance companies also attests to the fact that the market has been optimistic about the ultimate effects of the law on the health insurers. While the S&P 500 index has gone up 73% since the passing of the bill, UnitedHealth Group ( UNH ), Aetna ( AET ), Cigna ( CI ), Humana Inc. ( HUM ) and Anthem Inc. ( ANTM ) have outperformed with 293%, 245%, 282%, 294%, and 150% gains, respectively.

Let's discuss some of the opportunities faced by the changing industry landscape:

Consolidation Still Rife

The Affordable Care Act (ACA) has heightened the drive towards market consolidation.

The influx of the previously huge uninsured population into the space has increased overall membership. Now the players are scrambling to maintain and grow their member enrollment further; and the best way to achieve this by growing in size. With the health care law emphasizing value-based care, it becomes imperative for health insurers to have a large number of patients to dilute risk, and of course ensure premium dollars to cover the expenses of their sick enrollees, thereby improving overall health outcomes.

Moreover, a bigger size would help in leveraging fixed cost and reducing overall administrative cost (increase cost of compliance with the new health care law). A bigger market share will also equip them better to negotiate harder with hospitals. 'Get big or get out' has therefore become the trend in the industry.

The merger frenzy hit a fever pitch with Anthem agreeing to acquire Cigna and Aetna seeking the Humana buyout. The market is speculating that the "big five" insurers will merge into the "big three," likely comprising Aetna, Anthem and UnitedHealth.

Less Uninsured = More Revenues

The nation's uninsured rate has plummeted since ACA took effect. Before ACA, around 47 million lacked health coverage. As of the second quarter of 2015, the uninsured rate is 9.2% for all Americans. According to an ongoing NHIS/CDC study, the current uninsured rate of 9.2% for 2015 is the lowest in over 50 years.

Though the data clearly shows that Obamacare has accomplished its purpose, it also points to the huge insurance coverage provided by the health insurers. A reduction in uninsured rates implies membership gains for the insurers which go on to help their top lines. Most health insurers have reported a secular rise in their revenues from membership gains because of the law.

Individual/Public Exchange

State-based health insurance exchanges opened a couple years ago as a way for customers to buy subsidized individual health insurance, suited to income levels. It is anticipated that between 2015 and 2019, the Individual/Public Exchange segment will experience the highest membership growth via Public Exchanges. Most big players have stated that Public Exchanges will continue to fetch revenue growth. They also expect exchanges to develop and mature over time into a strong and viable growth market for them.

In the last open enrollment session, Aetna management commented that it had another highly successful enrollment period in its public exchange business, growing its membership to over 950,000, and exceeding its initial projections. UnitedHealth has also expanded its Public Exchange footprint to about two dozen states this year from four in 2014. Its larger presence better positions the company to gain new business in one of the faster growing segments - Public Exchange.

Medicaid Expansion

The expansion of the Medicaid program has created a new opportunity for the large participants. Early last year, the ACA expanded its Medicaid eligibility to nearly everyone under the age of 65 with income up to 138% of the federal poverty level. Medicaid Expansion led to a 9 million increase in enrollment in 2014, higher than the Congressional Budget Office projection of 8 million.

Insurers have welcomed new Medicaid members as growth has slowed in their conventional employer benefits business. UnitedHealth and Anthem are among the largest Medicaid providers. Other companies that have traditionally focused on employer-based coverage may seek to enlarge their Medicaid plans.

Rising Senior Population Presents Medicare Growth

According to U.S. Census data, the population of Medicare beneficiaries will grow by 36% by the end of this decade led by a vast aging baby boomer population. In fact, in the next 25 years, the compounded annual growth rate of the Medicare population is expected to increase to 2.7% from 1.5% at present.

Revenues from the managed-care plans of Medicare Advantage are expected to grow significantly as baby boomers retire. Medicare Advantage is a privately run version of the government's Medicare insurance program for the aged and disabled. Until now, only two of the public providers -- UnitedHealth and Humana -- control more than 10% of the market. However, we expect copious consolidation in this market. Carriers in the health insurance sector are in a race to win Medicare Advantage market share and the fastest way of achieving the target is by acquiring a company in the same business.

Shift to International Markets

Pressure on profit margins in the U.S. market has compelled American health insurers to look to foreign markets for sustained growth and profitability. International markets seem attractive as these are less penetrated and competitive compared to the U.S. Asia and Europe represent the best near-term opportunities for the U.S. health insurers.

Cigna and UnitedHealth Group lead the private health insurance industry in terms of international deal activity. They're followed by Aetna and Humana. The deals have either been mergers and acquisitions or joint ventures with local insurance companies.

Some of the deals made by players in this field echo the emerging trend toward globalization. In Apr 2014, Aetna bought U.K.-based InterGlobal, which offers private medical insurance to groups and individuals in the Middle East, Asia, Africa and Europe. Prior to that in Feb 2014, Cigna announced its debut in India's underpenetrated health insurance sector, in a joint venture with an Indian conglomerate TTK Group. In 2013, UnitedHealth bought a stake in AmilParticipacoes of Brazil for a nearly $5 billion. It already had a presence in Australia, the Middle East and U.K.

ACOs Gaining Prominence

Health insurers are trying to clinch accountable care payment contracts following the 2010 healthcare reform law's inclusion of Accountable Care Organization (ACO) tests under Medicare. The law's emphasis on providing accurate and efficient health care service rather than volume of service has led to the emergence of ACOs. These are formed when a group of health care providers (physicians, hospitals, non-physician providers, and the likes) collectively take responsibility for the financial and quality outcome for a defined population.

The ACOs are appealing to insurers as these reduce medical cost and improve outcome. Insurers form an essential part of ACO because these track and collect patient data, enabling an evaluation of patient care. Since clinical information and care processes are shared and supported by all providers, it becomes easier to manage care and effectively lower the cost. With Obamacare, health insurers have to be more than just a claims payer.

Under health reform, insurers have lost flexibility in ways that they can cope with rising medical expenses. They can no longer rely on many of their traditional medical underwriting strategies, such as exclusion of pre-existing conditions. The most effective approach for insurers now is to rely exclusively on current cost control mechanisms to manage members' medical expenses. Private commercial payers, such as Cigna, Anthem and Aetna are thus supporting ACO formation. CIGNA has one of the most established track records in the group for ACOs. On average, these companies have been able to hit 2% cost savings and 3% quality improvement targets within 2 years of the ACO formation.

Developing Ancillary Businesses

Insurers are eyeing growth and expansion opportunities that accompany the critical challenges of modernizing the health care system. They are branching out into non-traditional areas. Over the last few years, several large insurers have acquired companies that fall outside the realm of traditional health insurance yet complement it. Humana acquired Antiva in 2011 to provide analytics services, Aetna invested in Health IT by acquiring Medicity and UnitedHealth has the broadest approach to and the greatest potential in cross-selling synergies via its health benefits business via Optum. The Optum division is the poster child of UnitedHealth boasting successful diversification. The unit includes OptumInsight, a health care analytics company, OptumHealth, which provides health management and wellness services, and OptumRx, a pharmacy benefit manager.

Bottom Line

The discussion here shows that health insurance as an industry is primed for revolutionary changes and most of it is favorable to industry operators. Value- based provider payment models will continue to proliferate, and retail marketplaces will grow as employers shift to defined contribution arrangements. These changes will result in a consumer- empowered health care system.

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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.

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

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