3 Health Insurers Getting a Donald Trump Boost

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By enticing Americans who are on the average much younger, wealthier and healthier to buy health insurance on open markets, the health insurance reform plan embraced by Donald Trump will prove to be very lucrative for health insurers. Health insurance stocks aren’t reflecting that positive catalyst, making them very attractive at current levels.

3 Health Insurers Getting a Donald Trump Boost

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Specifically, investors should quickly buy health insurance stocks before they rise to reflect the benefits the companies will receive under the Republican plan, called the American Health Care Act.

Specifically, Aetna Inc (NYSE:AET), UnitedHealth Group Inc (NYSE:UNH) and Humana Inc (NYSE:HUM).

AET, UNH and HUM all offered plans on Obamacare exchanges in the past before deciding to pull out of all or most of the exchanges because they became unprofitable. As a result, all three companies will probably resume selling policies on many exchanges under the new rules created by the the American Health Care Act, which are much more favorable to them.

What Healthcare Reform Means for Health Insurers

Obamacare has focused on enticing low-income individuals to buy health insurance. In 2017, for example, a family of four that earns $32,319 or less will have to contribute just 2.04% of its income, or about $650, toward a silver health insurance plan, with the government picking up the rest of the tab. A family of four earning $48,600 would have to pay between 6.4%-8.21% of its income for the silver health insurance plan, or $3,110-$3,990 per year for its health insurance. Families of four who earn up to $72,900 have to pay 8.21%-9.69% of their income, or $6,000-$7,064 for the plan. Families of four with incomes of over $97,200 do not receive any benefits when they buy a silver plan.

As you can see, Obamacare has been great for very poor people who want health insurance. There are two problems with this system. First of all, poor Americans tend to be much less healthy than richer ones.

“Socioeconomic status is the most powerful predictor of disease, disorder, injury and mortality we have,” said Dr. Tom Boyce, the head of University of California San Francisco Division of Developmental Medicine. Secondly, the  rules of Obamacare are structured so that those poorer Americans who are healthy don’t have a great deal of incentive to sign up for Obamacare.

Specifically, the fine for not having health insurance was just $695 per adult this year, or 2.5% of taxable household income, whichever is greater, this year. So a healthy, young family of four earning $72,900 that is living paycheck to paycheck might very well pay the fine instead of forking over the $6,000-$7,000 they would need to buy a silver plan.

However, a family with the same income level that had one or more members with serious health problems might very well find a way to pay the $6,000-$7,000. Considering these two factors,  it’s no surprise that health insurers have lost money on the Obamacare exchanges.

Conversely, the plan supported by Donald Trump would make health insurance much more affordable for people with much higher incomes. Under the American Health Care Act, individuals making up to $75,000 and married couples earning up to $150,000 would be able to claim a tax credit of $2,000-$4,000 depending on their age. The tax credits would be “phased out in 10% increments.”

Not only, as noted above, do people with higher incomes tend to be healthier, but common sense would suggest that a healthy American who makes $74,000 would be much more likely to spend $1,000 each year on health insurance than a healthy American who makes $30,000.

As a result, the plan supported by Donald Trump is likely to cause much healthier, younger people to sign up for health insurance on the open market than Obamacare. Finally, by making health insurance much more affordable for Americans with higher incomes, the American Health Care Act increases the likelihood that those Americans will buy better insurance with higher premiums, thereby raising the profits of health insurers like AET, HUM and UNH and causing those health insurance stocks to rally.

Furthermore, the bill supported by Donald Trump, in comparison with Obamacare, decreases the chances that poorer, less healthy people will buy health insurance. As CNN points out, a 27 year old making $20,000 per year would only get $2,000 in tax credits under the American Health Care Act, versus the $3,225 that he would have gotten in subsidies under Obamacare.

If this 27 year old had a major illness, the chances of him finding a way to afford health insurance was much higher under Obamacare than it would be under the bill supported by Donald Trump.

The American Health Care Act has other features that are very positive for health insurers. It lets them charge Americans between the ages of 60-64, most of whom will probably buy insurance if they can at all afford to do so, at 22% higher premiums than Obamacare.

The legislation would also enable health insurers to deduct more of their executives’ salaries, and it would allow insurers, including AET, HUM and UNH, to levy a 30% surcharge for a year on the premiums of those who let their coverage lapse.

The latter provision would make Americans less likely to let their coverage lapse, and would make it less likely that poorer Americans who did not have health insurance could buy coverage after they got sick; and would, unlike Obamacare, provide insurers with additional revenue if people did obtain health insurance after getting sick.

Bottom Line for the Health Insurers

Considering the opposition by some GOP members of Congress to the American Health Care Act, there is some doubt about whether  the legislation can pass and whether major changes will be made to it. However, in the past 25 years, almost all of the major legislation backed by first-term presidents has passed, with only relatively minor revisions.

Specifically, Clinton’s first budget, Bush’s tax cuts and Obama’s stimulus and health care plan all passed with most of their provisions intact. Only Clinton’s health care plan was rejected. So history indicates that the American Health Care Act has a very good chance of passing.

And if it does, the profits and stocks of AET, HUM and UNH should get a significant boost. Investors should buy those health insurance stocks immediately.

As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been SMCI, INTC, and MGM. You can reach him on Stocktwits at @larryramer.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/3-health-insurers-getting-a-donald-trump-boost/.

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