by Susan J. Aluise | June 5, 2012 7:00 am
As the U.S. Supreme Court mulls the fate of President Barack Obama’s signature health reform law, the way these six men and three women eventually rule could have a significant impact on the stocks of managed care companies. And in almost every scenario but one, managed care companies could come out winners.
If the entire Affordable Care Act wins the constitutional challenge, managed care companies and insurers win big because they get to divvy up as many as 32 million new customers who’ll be required by law to buy health insurance — many of them young and healthy. That should more than offset any losses incurred by the requirement that the companies accept those with preexisting conditions or health risk factors.
If the entire law is ruled unconstitutional, managed care companies basically will deal with the status quo. While the government can and will make changes to Medicare and Medicaid, health reform advocates likely will need to regroup and find another approach. Managed care companies will still be able to price for risk and establish their own acceptance policies.
The bad news scenario: If the Supreme Court strikes down the most contentious part of the law — the so-called “individual mandate” — while letting stand the requirement that managed care plans must accept all applicants regardless of preexisting medical conditions, health risk factors or age.
In the carrot-and-stick of health care reform, guaranteed coverage is the carrot, but the individual mandate is a stick the size of a steel girder. Under the mandate, virtually every American would be required to buy into a health plan or face a tax penalty. If managed care companies are forced to accept everyone, they need the individual mandate to bring in young, healthy individuals — or they’ll lose big.
And the most endangered clause in the ACA is clearly the individual mandate. Opponents argue that it’s unconstitutional to penalize an individual for not buying a good or service. Although states mandate auto insurance for all drivers, opponents note that you can opt out of that mandate simply by not driving.
The High Court is expected to rule on the ACA as early as this month. Since its rulings are often inscrutable but seldom stupid, it’s hard to imagine the ACA surviving with the health coverage guarantee intact and the individual mandate stripped out.
These justices understand the impact of their decisions on the free market — and on the stock market. But if they do what the ancient King Solomon proposed and “split the baby in half,” I don’t like any managed care stocks in the short term.
That said, I think the odds are better that the High Court will temper its judgment and give managed care companies something they can live with — at least until the next group of politicians starts tinkering with the system. That means health plans and hospitals like those named here should do well. In addition, here are three managed care companies that could win big if Obamacare clears the Supreme Court’s hurdle intact:
The nation’s largest health plan, United Health (NYSE:UNH) provides health services to nearly 80 million Americans. Its lines of business run the gamut from large- and small-business health benefit plans to acute and long-term Medicaid through a network of more than 750,000 doctors and health professionals and nearly 5,500 hospitals. It also provides specialty benefits like vision and dental through its OptumHealth and OptumRx health and benefit management units. UNH also offers health plan management for self-insured employers.
UNH scored a coup in March when the Department of Defense awarded it a five-year, $20 billion contract to administer the Pentagon’s Tricare health benefits program for active-duty military and retirees in the 21-state West region beginning next April. The contract will give UNH nearly 3 million more customers and $1.4 billion in additional sales over the next five years. The former contractor, TriWest Healthcare Alliance, is protesting the award
UNH is trading around $55, 33% above its 52-week low last August. The stock has a price-to-earnings growth ratio of 1, indicating it’s fairly valued, though its forward P/E of 11 is on the high side of the sector.
UNH has size, market power and a flair for innovation — including a new online medical pricing program that lets members “shop” out-of-pocket costs for common medical procedures. It also sports a modest dividend of 1.2%. Buy UNH with a price target of $64.
WellPoint (NYSE:WLP) CEO Angela Braly has taken a lot of lumps at the hands of health reform advocates, but she has her company well positioned to take advantage of the managed care sea change.
WLP offers a wide variety of managed care plans including HMOs, PPOs, consumer-driven, point-of-service and hybrid plans, and it holds the exclusive Blue Cross/Blue Shield license in 14 states. The company also participates with Medicare and Medicaid and won a $273 million administrative contract for those services last fall.
On the downside, WLP reported in April that its membership has fallen about 2% over the past year. The ACA could drive a lot of customers to WLP if the law’s individual mandate is upheld. The company is taking the smart step of diversifying: WLP announced Monday it will acquire 1-800-CONTACTSto stake a claim in the direct-to-consumer business
WLP is trading around $65.50, 15% above its 52-week low last August, though it has slipped about 11% over the past couple of months. WLP’s PEG ratio of 0.8 indicates it’s undervalued, and its forward P/E of a little above 8 compares favorably to many of its peers. It also has a decent 1.8% dividend.
Although the year-over-year membership declines and its -15% one-year returns are concerns, WLP still has several things to like, particularly if Obamacare is upheld. Holding the exclusive license for the Blues in 14 states — especially in California — will put the focus on new customers entering the system. And if leveraged properly, the 1-800-CONTACTS diversification is smart and will pay off for WLP regardless of the outcome of the ACA challenge.
I consider WLP a buy, with a price target of $74. But shares actually slipped on Monday despite the 1-800-CONTACTS news, so it easily could slide further before the Court hands down its ruling.
Like all companies in the sector, Aetna (NYSE:AET) is closely watching what happens to the ACA. But CEO Mark Bertolini predicts that at least some of the law will survive the constitutional challenge — particularly those parts that are most attractive to consumers, like keeping adult children on their parents’ policies until they turn 26. “You’ll see this big movement for repeal, but you’ll very quickly hear ‘replace’,” Bertolini said at the recent Sanford Bernstein investors’ conference in New York.
AET boasts nearly 18 million members. It offers consumer-directed plans as well as employer plan benefits in all 50 states. It serves Medicare and Medicaid in certain markets, although it’s exiting Connecticut’s Medicaid program.
In April, Aetna reported first-quarter earnings were 13% lower than the same quarter last year. On the upside, it has invested heavily in technology to gain greater efficiency, and its health insurance partnership with Costco (NASDAQ:COST) is a savvy move
AET is trading around $40.50, 21% above its 52-week low in August, but down about 19% in the past two months. AET has an attractive 0.7 PEG ratio and a forward P/E of 8, and it yields 1.7%.
Of the three managed care stocks mentioned here, a ruling to uphold the individual mandate could benefit Aetna the most because it could accelerate the reversal of recent membership declines. Its Healthy Commitments employer wellness programs would be a great fit for what will likely be a shift toward incentive-based health management at many companies. I rank Aetna a buy, with a target of $50.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
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