Health insurance exchanges were created by the Affordable Care Act (ACA). Exchanges are a market place for consumers to find individual and family coverage and for insurers to easily access customers. It’s a web site that serves like any other ecommerce site, in theory.
But, ACA exchanges are unlike anything else. They are a source of political debate and of strong opinions. But, from an investor’s perspective, none of that matters. What is important to investors is whether or not insurers can profit by offering products through the exchanges.
After several years of general problems on the exchanges, insurers seem to be acting like they are profitable and now could be an ideal time for investors to consider the sector as a potential buy.
According to The Wall Street Journal, “…insurers are increasing their footprints in the Affordable Care Act marketplaces next year, despite uncertainty including the latest court challenge to the health law.”
- Strange “Heartbeat” Gives You Three Chances to Double Your Money Every 30 Days
Discover the strange "heartbeat" pattern that’s been going strong for over 86 years - even when markets are going crazy. And how this “heartbeat” can give you up to three chances to double your money every 30 days... We’re talking potential pocket payouts of $6,380... $8,100...even $9,950 month after month—all year long.
Problems Are Developing Almost As Expected
At first, the exchanges were a new and unproven business model. There was no reason to expect that the insurance companies would meet consumer expectations and provide services in a profitable manner given the lack of data about the markets.
Insurance is, and always has been, based on data. There is no way to know precisely who will die or become sick with an expensive disease in the next six months. But, given a population base of tens of millions of people, insurers can come up with approximations on the expected number of deaths of illnesses.
They won’t know who will need benefits, in other words, but insurance companies can forecast how much benefits will cost in existing markets where they have collected extensive data. They won’t always be right but they will generally be profitable over the course of several years.
Exchanges disrupted that basic business model. There was no data on who the customers would be nor how they would access services. This was bound to create problems for either insurers or customers and, not surprisingly in hindsight, it created problems for everyone.
Now, there is data and insurers are returning to the market “…after years of rate increases that have helped premiums catch up to costs, said Cynthia Cox, a director at the Kaiser Family Foundation.
The Kaiser foundation found in an earlier analysis that insurers’ financial performance on plans sold to consumers improved sharply last year, achieving the best results since the ACA’s major market changes went into effect in 2014.
“They’re feeling more confident in their ability to be profitable in this market,” said Ms. Cox.”
Now, insurers are likely to face some degree of uncertainty, but their business does involve a necessary degree of uncertainty. There is also legal uncertainty in the market.
In 2019, enforcement of the health law’s requirement for people to have health insurance will end. The current administration is considering allowing alternative types of coverage, which could reduce the number of consumers on the exchanges. There are other issues, as well.
But, market participants know this.
“We’re not going into this with blinders on,” said Linda Hines, chief executive of Virginia Premier, which is owned by health system VCU Health and hasn’t previously sold ACA plans. “We’re not going in saying, ‘we’re going to make x percent margin.’”
Expanding Markets Could Make Good Investments
In recent years, officials note that there had been a steady decrease in the number of insurers in many ACA markets, with the average number per state dropping to 3.5 this year, from 4.3 in 2017 and 6 in 2015, according to the Kaiser foundation.
Large national insurers Aetna Inc., Humana Inc. and UnitedHealthcare, a unit of UnitedHealth Group Inc., pulled back sharply, while Anthem Inc. withdrew from many regions.
Analysts believe that there won’t be many more cases of insurers leaving the market. A consulting firm, Oliver Wyman, found none that planned to shrink their ACA-plan geography.
In a survey of 29 insurers that answered a question about their ACA offerings for next year, 21% said they were expanding and the rest weren’t changing their footprint.
Centene Corp. (NYSE: CNC) is among the companies that have completed regulatory filing indicating plans to sell new products in several states including North Carolina, Wisconsin and Utah.
Molina Healthcare Inc. (NYSE: MOH) has made similar filings. The company left Utah and Wisconsin’s exchanges this year but recently said it would file for marketplace plans in both states for 2019, in addition to the seven where it currently sells ACA plans.
The company did leave the door open to future changes noting that it will ultimately “evaluate our participation on a market-by-market basis.”
MOH may be the more volatile of the two companies.
In addition to entering North Carolina, Centene filed to offer plans in Tennessee, where it isn’t currently selling them. The insurer said it will “enter a few new markets in 2019, as well as expand its service area in several existing states.”
The chart of CNC is shown below and it shows a steady uptrend over most of the last year. The stock might also offer the better value with a price to earnings (P/E) ratio of about 15 based on next year’s expected earnings, about 75% of MOH’s P/E ratio.
These companies still face a number of unknowns but the fact that they are entering the new markets is an indication that they believe there are less unknowns today than were a year ago. This is a signal that investors should consider following the company’s announcements and also, potentially entering the markets.
As with any stock, timing the trade properly could increase the probability of gains. The TradingTips.com service, PPK System, is designed to exploit patterns associated with market clues by looking for value and momentum in stocks.
This combination of value and momentum has been shown by many researchers to be the cornerstone of strategies that beat the market in the long run. The PPK System follows strict rules for buying and selling. You can learn more about this trading service by clicking here.