In Fiscal year 2019, the United States federal budget will be $4.4 trillion. 24% of that staggering number is spent on Medicare and Medicaid at $625B and $412B, respectively. The number of citizens enrolled in Medicare has tripled since 1970, rising from 20 million to 60 million participants, and is expected to rise to 90 million by 2048. The number of people in the U.S. who are 65 or older will grow from 51 million today to 67 million in the next 30 years and the number of covered children and adults with disabilities who are also covered by Medicare will likely grow as well.
Health care needs and costs rise quickly as citizens near retirement age with an average of more than $20,000/year spent on Americans over 65, versus about $7,000/year for working age adults and less than $5,000/year for children under 18.
During the demographic shift that’s occurring, Hospital corporations have become adept at navigating the system for government health care reimbursement, implementing sophisticated algorithms that maximizes billing revenues for all of the services and products they provide. In 2016, Medicare and Medicaid paid $213 billion or 59% of total revenue at the nation’s five largest for-profit health insurance companies, more than double the $93 billion they paid just 6 years earlier in 2010.
The basic necessity of health care makes the industry naturally defensive. Even in a recessionary environment, consumers can’t easily cut the use of – or spending on – medically necessary treatments while they certainly can defer the purchase of homes, cars, durable goods and luxury items. Revenues in the Hospital industry don’t have the potential to explode the way they do for technology and internet companies that have hot products, but they tend to trend steadily upward, with facility admissions and revenues per admission growing consistently in the 2-4% range annually.
The aging of the American population would seem to predict that this trend will continue for the foreseeable future.
HCA Healthcare (NYSE:HCA) is among the best managed large hospital operators in the U.S. Operating 178 hospitals and over 1,800 total “sites of care” including imaging centers, urgent care facilities and physician clinics in 20 states and also the U.K., HCA aggressively manages expenses and takes advantage of vast economies of scale in the procurement of supplies, while still providing a high level of care for patients.
In Q2, HCA reported revenues that increased 7.4% year over year to $11.5B while operating expenses grew less than 1% from $8.57B to $8.66B. Net earnings of $2.29/share represented an increase of 30% over the $1.75/share they earned in Q2 2017. After guiding higher for the full year 2018, HCA saw 13 upward revisions and the Zacks Consensus Estimate now stands at $9.23/share, 40% higher than 2017. HCA is a Zacks Rank #1 (Strong Buy).
In addition to hospitals, Health Maintenance Organizations (HMOs) that specialize in Medicare and Medicaid also benefit from increased government spending on health care. WellCare Health Plans (NYSE:WCG) and Molina Healthcare (NYSE:MOH) excusively serve patients with Medicare or medicaid and have had a sensational year so far in 2018, with shares up 50% and 82%, respectively. Both stocks currently carry a Zacks Rank #1 (Strong Buy).
After a huge beat in Q2, Molina has seen the Zacks Consensus Estimate for 2018 earnings rise oer 60% in just the past 30 days, from $4.62/share to $7.50/share.
WellCare has topped estimates in each of the previous 14 quarters and is now expected to earn $10.88/share for the full year, 28% higher than the $8.52/share they reported in 2017.
These are great times for the best-managed health care companies and investors who find the sector underrepresented in their portfolios would be wise to check out these three top performers.
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