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Zacks Industry Outlook Highlights: Molina Healthcare, Centene, WellCare Health Plans and UnitedHealth Group

For Immediate Release

Chicago, IL - February 13, 2017 - Today, Zacks Equity Research discusses the Industry: Chemicals, Part 2, including Molina Healthcare Inc. (NYSE: MOH - Free Report ), Centene Corp. (NYSE: CNC - Free Report ), WellCare Health Plans, Inc. (NYSE: WCG - Free Report ) and UnitedHealth Group Inc. (NYSE: UNH - Free Report ).

Industry: Health Insurance, part 2

Link: https://www.zacks.com/commentary/103487/will-health-insurers-face-the-music-of-trump39s-policies

Though the health insurance industry has always faced regulations, the Affordable Care Act (ACA) or Obamacare, enacted in 2010, was more regulatory than most. The reform with its numerous provisions took away working flexibility from insurers who were at ease before the reform.

Now, after having adjusted, insurers might have to reassess their business strategies in the wake of the Trump presidency, which is eager to repeal and replace the ACA.

The year 2016 was an eventful one for the industry, which saw two mega-mergers - that of Anthem with Cigna and Aetna with Humana - facing the ire of regulators on concerns that these would stifle competition in the markets. While the merger of Aetna with Humana was blocked by regulators last month, the other is also expected to suffer the same fate.

Insurers were eager to form the merger in an attempt to gain scale to garner a greater share of the market. The fast-changing health insurance industry posed numerous growth challenges and the best way to expand quickly was to merge or acquire. Medicare Advantage is robust because of the aging baby boomer population, which is causing a surge in demand.

However, regulators cited that both deals would have made the emerging companies big players in the market, which was already concentrated with five major players. The deals would have created an oligopolistic market where the companies would have the upper hand when dealing with customers. So the central aim of providing affordable health care would have come under question.

Another major event that has rattled the industry was the election of President Trump, who is eager to undo the health care reform act with which insurers have finally made peace.

Trump Threats

Just after taking the oath, Trump signed an executive order in relation to health care reform, signaling his urgency to reshape it. Trump's executive order gives broad power to the federal agencies to undo stringent regulations enveloping the ACA. This includes the individual mandate which requires every Americans to get a health insurance policy or to face a penalty.

Though the order did not specify what needs to be done, Larry Levitt, senior vice president at the Kaiser Family Foundation, stated that "Potentially the biggest effect of this order could be widespread waivers from the individual mandate, which would likely create chaos in the individual insurance market."

The order also stated that one of the goals will be to provide greater flexibility to states. It is being inferred that this would mean granting block aid to states for Medicaid in place of open-ended funding under Obama. Open-ended funding provided greater flexibility to the states to manage their Medicaid program, the premiere health insurance program for low-income Americans.

Open-ended funding, by both federal and state governments, led to Medicaid expansion and brought more than 20 million people in the U.S. under the insurance net. If the state falls short of funds like in the case of excess expenditure on Medicaid, it can turn to the federal government for extra funding.

Trump, however, wants to cut funding on Medicaid by giving a block fund to each state after which the states will be on their own, without recourse to federal funds in case of a shortfall. This will, however, take away their flexibility. It is being widely anticipated that in order to manage their funds, the state governments might cut off benefits under Medicaid, impose premiums or make other changes such as elimination of subsidies that would make Medicaid unattractive and drive people away from getting coverage under it.

The individual mandate and Medicaid expansion under the ACA provided coverage to nearly 25 million people. A repeal of this is expected to leave 20 million people uninsured, though that will run counter to the President's campaign pledges.

A threat to ACA's individual mandate provision and Medicaid expansion spell trouble for companies with Medicaid-centric business such as Molina Healthcare Inc. (NYSE: MOH - Free Report ), Centene Corp. (NYSE: CNC - Free Report ) and WellCare Health Plans, Inc. (NYSE: WCG - Free Report ). The stocks of these three companies have suffered the most since Nov 9, 2016, the day when the outcome of election was revealed.

It is not that Obamacare was a total positive for the industry as it brought with it many hindrances. However, adjusting again to new changes to be bought in by the new administration will have to get insurers reworking their business strategies.

Almost all the changes in the industry in recent years (after 2010) are a direct or indirect outcome of the reform. The industry is witnessing a shift from volume-based care to value-based care, growing consumer discretion, greater use of information technology and pricing pressure from increasing competition.

Public Exchanges Woes

Public Exchanges made their debut in Oct 2013, and were considered one of the signature achievements of Obamacare aimed at providing subsidized insurance to millions. The insurers were also sanguine about the exchanges, hoping to make big business out of them. But health insurers are now struggling to profit from the public exchange business.

These insurers are saddling high medical expenses of individuals who are buying the subsidized policies under the health care law. The public exchanges attracted a disproportionate number of unhealthy individuals compared to healthy ones. A higher percentage of unhealthy patients led to higher claims for the insurers, thus leading to losses from the policies sold to these groups of people.

Big players like UnitedHealth Group Inc. (NYSE: UNH - Free Report ) and Aetna have significantly reduced their presence on these exchanges. Other players are also considering doing this.

If most of the players realize that the exchanges are not generating profitable business, a mass exodus may happen which may hamper the functionality of the exchanges and cause a failure of the Obamacare exchanges, thus defeating the basic aim of providing coverage to millions of uninsured Americans.

Margins Under Pressure

Health insurers are expected to witness a lower margin environment. A host of factors including compliance costs related to health care reform regulation, increased fees and taxes, pricing pressure, stiff competition and rising medical costs will likely squeeze the bottom line.

A general shift in patient mix from Commercial insurance to Government (Medicare, Medicaid and State-subsidized marketplace or exchange) will also affect profitability to a large extent. Premiums for Medicare, Medicaid and state-subsidized policies tend to be higher due to serious health issues for many enrollees; however, they carry smaller profitability margins compared to commercial insurance.

High Regulatory Cost

Regulatory reform sweeping through the sector has hit insurers with high compliance costs. The expenditures involved in redoing the internal systems can pinch them hard. There has been huge spending on health information technology (HIT), following the implementation of The American Recovery and Reinvestment Act of 2009, or Recovery Act, which contains the Health Information Technology for Economic and Clinical Health Act, or the HITECH Act. Notably, HIT includes electronic health records or EHRs, health information exchanges or HIEs and other initiatives.

The federal government's emphasis on the use of health IT, which helps providers communicate better with each other about patient care, reduces medical errors, paperwork and needless duplicate screenings and tests, leading to better coordinated patient care and lower health care costs. These have increased health care information technology spending. Financial incentives offered by regulators to providers and hospitals for the implementation of the meaningful use of health care IT products are primarily driving IT spending.

Rising Consumerism

Rising consumerism is the reality of the health insurance industry. Until the implementation of the ACA, the insurance companies had an upper hand in choosing to whom to provide coverage, and consumers (people receiving health care) had no active role in the decision-making process.

But now the trend has changed. Health insurance reform has put consumer power and choice in the hands of the people, and ensures that all Americans receive health care services that they need. Consumers' increased purchasing power and access to information to take health care decisions are the major threats to insurers.

Prior to reform, big insurers dominating large markets hardly ever bothered to provide consumers with even basic information such as the performance of health insurance policies, procedures to claim, the size of the provider network and cancellation processes. Now, customers demand transparency, value and convenience, leaving insurers grappling for innovative ways to satisfy these unmet needs. The new mission, however, will not be easy to execute.

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Molina Healthcare Inc (MOH): Free Stock Analysis Report

Centene Corporation (CNC): Free Stock Analysis Report

WellCare Health Plans, Inc. (WCG): Free Stock Analysis Report

UnitedHealth Group Incorporated (UNH): 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.


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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