by Susan J. Aluise | March 24, 2014 2:27 pm
As the clock ticks down to the Affordable Care Act’s March 31 deadline, some healthcare stocks are poised to deliver gains, despite lower-than-expected enrollments in President Obama’s signature health insurance exchanges.
With less than two weeks to go until the Obamacare mandatory health insurance enrollment deadline for 2014 hits, the Department of Health and Human Services (HHS) this week said that more than 5 million people have signed up for new coverage in federal or state health insurance marketplaces so far. Although that was positive news, it’s a far cry from the 7 million initial subscribers expected under the Affordable Care Act.
Health insurers, who would use the Affordable Care Act exchanges to compete for some 30 million new customers, were supposed to be big winners. But it hasn’t exactly gone according to plan. In theory, adding millions of younger, healthier individuals to the insurance pool balances the added costs of older individuals with pre-existing conditions. But in practice, 34% of uninsured Americans plan to remain so this year, according to Bankrate’s most recent Health Insurance Pulse survey.
What’s worse: HHS is eying far tougher regulations next year against health plans with narrow provider networks. That means healthcare stocks like Humana (HUM), Cigna (CI), Aetna (AET) and WellPoint (WLP), which have gained more than 50% in the past year, could face headwinds as they try to expand provider networks while keeping premiums low.
Although big insurers may retreat in the near term, here are three healthcare stocks still poised to win big from the Affordable Care Act:
Molina Healthcare (MOH) is an insurance payor focused on the Medicaid niche — it covers an estimates 2 million patients in 11 states.
MOH has a big opportunity now because the Affordable Care Act was written to expand state Medicaid programs to individuals with incomes at or below the federal poverty level — $16,000 for an individual; nearly $33,000 for a family of four. Although the Supreme Court ruled that states could opt out of expanding their Medicaid programs, 26 states and the District of Columbia have elected to expand — and other states are under pressure to reconsider.
Although Medicaid has far slimmer margins than other business lines, MOH has the expertise to gain volume as enrollees grow. It also has a strong Medicaid franchise in two key states: California and Washington. MOH has a price to earnings growth (PEG) ratio of only 0.8, suggesting that the stock could be undervalued. It also has a forward P/E of 14, lower than many other healthcare stocks.
Magellan Health Services (MGLN) recently rebranded its business lines into three distinct units. The company’s behavior health affiliates, along with integrated health business Magellan Complete Care, are branded under the Magellan Healthcare business. Magellan Rx Management focuses on Magellan’s pharmacy business. And the specialty solutions business is now branded under NIA Magellan.
Although MGLN took a huge earnings hit in the fourth quarter of last year due to higher costs in providing care, its revenue continues to strengthen and should fare well with growth in public-sector pharmacy volume, as well as the launch of new products and services.Those new services include a particularly innovative audit tool, MRxAudit that can be used by groups to determine the effectiveness of their pharmacy benefit management services.
Another positive: Florida’s Agency for Health Care Administration chose MGLN to administer its Medicaid specialty plan for individuals with serious mental illness. The program will be implemented in eight regions throughout Florida and in 40 of its 67 counties. Right now, MGLN stock has a forward P/E of about 19 — roughly average for healthcare stocks.
When it comes to achieving success with the Affordable Care Act, don’t underestimate the power of information technology to help or hinder the progress. Given the disastrous technical problems that attended last fall’s launch, the heat is on all parties to ensure that the technology works as advertised.
Cerner (CERN) is a key player in the health information systems space and it could find a particularly lucrative role as a problem solver in 2014. One particular focus of innovation is electronic medical records (EMRs). According to a new report by Utah-based KLAS Research, nearly half of all large hospitals will invest in new EMR technology by 2016.
CERN’s strong focus in that niche could drive profitability — and share price — over the next two years, particularly as pressures rise to make health information systems more secure and interoperable. So far this year, CERN has gained more than 8%. The fact that CERN is trading at more than 30 times forward earnings and has a PEG ratio of 2 makes it look overvalued, compared to other healthcare stocks. However, the explosion of EMRs is likely to make CERN an attractive growth play.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.
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