Health Insurance Stocks Gain As Humana Says Government Cuts Won't Be As Bad As Feared

Feb 25 2014, 1:03pm CST | by

UnitedHealth Group’s stock gained 3% on Monday after peer Humana announced that the government’s cuts to the Medicare program would not have as severe an effect as earlier estimated. Humana’s stock surged 11% following the announcement while Aetna gained 2%.
/>

The Medicare program provides healthcare services to individuals aged 65 or older and younger people with disabilities. It is run by the Centers for Medicare and Medicaid Services, with companies like UnitedHealth assuming health care insurance coverage in return for a fixed monthly premium per member served from CMS. There are close to 50 million Americans enrolled in the Medicare program, of which around 21% are enrolled through UnitedHealth, making it the largest provider in the country. More than 30% of the company’s revenues and EBITDA come from this division.

Our $74 price estimate for UnitedHealth’s stock is in line with the current market price.

See Full Analysis For UnitedHealth Group Here

Medicare funding comes from the Hospital Insurance Trust Fund and the Supplementary Medical Insurance Trust Fund, held by the U.S. Treasury. The funds utilize payroll taxes paid by employees and employers as well as other sources such as income taxes paid on Social Security benefits and premiums from people who aren’t eligible for premium-free Medicare coverage. Total government expenditures on the Medicare program are around $550 billion per year.

However, following the implementation of the Protection and Affordable Care Act and the online health insurance exchanges, the government has decided to cut Medicare payments to insurance companies by nearly 30% in the next 10 years. UnitedHealth has been preparing for the rate reductions and has resorted to cost cutting and fraud prevention measures in the past, but its bottom line has been affected by the government funding cuts; the United HealthCare division’s EBITDA margin dropped from 9% in 2012 to 7.6% in 2013, partly because of the aforementioned cuts.

Humana has announced that the proposed funding cuts will lead to a funding decline of 3.5% to 4% instead of the 6% to 7% range it had earlier expected. This will also have a positive impact on UnitedHealth, which has a share of more than 20% in the U.S. Medicare market. However, we still expect a slight decline in margins in the coming years. More than 80% of UnitedHealth’s operating expenses are medical costs, and the company has maintained a medical care ratio of 80% for the last few years. However, the PPACA mandates a minimum medical care ratio (medical costs divided by premiums) of 80% for individual and small group plans, and 85% for large group plans. The impact of this was observed in 2013 earnings, as the medical care ratio increased from 80% in 2012 to 82% and could still increase further.

Other Factors

Another mitigating factor is the so-called “adverse selection death spiral.” The PPACA requires policies to be issued regardless of community rating or medical condition, with insurers offering the same premium to all insured parties of the same age and location, regardless of gender or pre-existing condition. The act also offers subsidies to low income individuals and families with income below the federal poverty level. This means that the cost of health insurance will increase for young and healthy citizens who might be disinclined to opt for the plans. Younger and healthier citizens are likely to visit medical providers less frequently, which could benefit health insurers.

We expect UnitedHealth’s margins to fall to around 6.7% by the end of the decade, but there is a 10% upside to our price estimate if the company can maintain its current EBITDA margin of 7.6%. The potential upside is around 20% if the company can maintain an EBITDA margin close to the historical average (from 2010 to 2012) of 9%, though that is unlikely.

See More at Trefis | View Interactive S&P Capital IQ Analyses (Powered by Trefis)

Like our charts? Embed them in your own posts using the Trefis WordPress Plugin.

Source: Forbes Business

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

US reporter requests privacy after release
Washington, Aug 28 (IANS/EFE) The US journalist, who was freed this week by the miltants in Syria after two years in captivity, Wednesday thanked everyone for their efforts to secure his release and asked for privacy to be with his family.
 
 
Congo confirms six Ebola cases
Brazzaville, Aug 28 (IANS) Six cases of the Ebola virus have been confirmed in Democratic Republic of Congo (DRC), Health Minister Felix Kabange Numbi said Wednesday.
 
 
IMF chief faces investigation in corruption case
Paris, Aug 27 (IANS/EFE) International Monetary Fund (IMF) chief Christine Lagarde has been put under investigation in France for "negligence" after being questioned for hours in a corruption case, judicial sources said Wednesday. She denied wrongdoing.
 
 
Whale tourism affecting marine animals' behaviour
London, Aug 27 (IANS) Boat trips to watch whales and dolphins may increasingly put the survival of marine mammals at risk, conservationists have warned.
 
 
 

Latest from the Network

Most people take my clothes too seriously: Rick Owens
Los Angeles, Aug 28 (IANS) American fashion designer Rick Owens believes his fans takes his designs too seriously. The California-born designer, known for his statement drop-crotch shorts and leather jackets, believes...
Read more on Celebrity Balla
 
US reporter requests privacy after release
Washington, Aug 28 (IANS/EFE) The US journalist, who was freed this week by the miltants in Syria after two years in captivity, Wednesday thanked everyone for their efforts to secure his release and asked for privacy...
Read more on Ad Balla
 
Chris Martin writes love songs about Jennifer Lawrence
Chris Martin is ''sweeping'' Jennifer Lawrence ''off her feet.'' The Coldplay frontman, who split from Gwyneth Paltrow in March after 10 years of marriage, has reportedly been pulling out all the stops to romance 'The...
Read more on Celebrity Balla
 
Neil Young will continue to support ailing son
Neil Young and Pegi Young will continue to co-parent their ailing adult son. The 68-year-old 'Heart of Gold' hitmaker, who filed for divorce from the 61-year-old singer last month after 36-years of marriage, stated in...
Read more on Celebrity Balla
 
Dating actresses best for Daniel Radcliffe
London, Aug 28 (IANS) Actor Daniel Radcliffe says dating actresses works well for him as they understand the demands of the industry. The "Harry Potter" actor is currently in a relationship with his "Kill Your...
Read more on Celebrity Balla
 
Egypt accuses Morsi of leaking documents to Qatar
Cairo, Aug 28 (IANS) The Egyptian prosecution ordered Wednesday to temporarily detain former Islamist president Mohamed Morsi for 15 days on charges of leaking "national security documents" to Qatar, media reported....
Read more on Politics Balla
 
Poland sends humanitarian aid for Ukrainian soldiers
Warsaw, Aug 28 (IANS) The Polish National Defence Ministry said Wednesday humanitarian aid for Ukrainian troops is already on its way. Poland will provide around 320 tonnes of relief supplies, including food, blankets...
Read more on Politics Balla
 
Child abuse: British police commissioner's resignation demanded
London, Aug 28 (IANS) Police commissioner of the British metropolitan county of South Yorkshire has come under fire from various quarters after an inquiry exposed shockingly child sexual abuses. Leaders from different...
Read more on Politics Balla
 
UN Security Council urges for immediate ceasefire in Libya
United Nations, Aug 28 (IANS) The UN Security Council Wednesday adopted a resolution on Libya, calling for an immediate ceasefire while expanding sanctions on those who involved in the violence there. The 15-member...
Read more on Politics Balla
 
Cara Delevingne to star in 'Zoolander' sequel?
Los Angeles, Aug 28 (IANS) Model Cara Delevingne may star in the upcoming "Zoolander" follow-up alongside Ben Stiller. The 22-year-old model is said to be negotiating with the movies' star, Stiller, over the female...
Read more on Celebrity Balla