Here's Why the Roof Hasn't Caved in on Health Insurers Under Obamacare

NEW YORK (TheStreet) -- If you listened to lobbyist predictions about the Affordable Care Act and sold the health insurers when the act was passed in 2010, you may be spitting out your corn flakes today.

If you listened to what I wrote in October, on the other hand, you're probably smiling.

All of the largest health insurance companies continue to do well. UnitedHealth (UNH) is just the latest to report earnings, and this month represents the first batch of earnings to come out reflecting results from the Obamacare exchanges.

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For the quarter ending in June, UnitedHealth reported revenue of $32.6 billion with net earnings of $1.4 billion, or $1.42 per share. The forecast of 16 analysts following the stock was for earnings of $1.25 per share. At around $85.60, share are up nearly 14% for the year to date.

UnitedHealth shares had already been gaining before earnings despite a recent downgrade from Jefferies. 

Over the last five years investors have gained 128% on shares of WellPoint (WLP), 281% on Cigna (CI), 218% on Aetna (AET), 241% on UnitedHealth and a whopping 354% on Humana (HUM).

What happened?

From a financial point of view the law has done what it promised. It brought in new customers, creating a new individual insurance market, and led to the creation of policies with big incentives for both insurers and patients to hold costs down.

The most-popular "silver" plans sold on the exchanges still have patients footing 20% of bills. That's an incentive for them to avoid unnecessary tests and procedures. It also makes it profitable for insurers to provide wellness services and to be proactive regarding chronic conditions like diabetes and hypertension, which can be managed profitably through medication.

Hospitalizations, in other words, now cost both patients and insurers a lot more than actions that prevent hospitalizations.

The new plans are also built on networks of doctors, which let insurers drop those who aren't following best practices, are charging abnormally high prices or are pushing unproven therapies. Automation is another trend in which UnitedHealth has been especially active through its Optum Health unit, which saw a revenue gain of 28% and earnings growth of 23% year-over-year in the latest earnings report.

Most of the insurers saw this coming. Since the ACA was passed in 2010 nearly all have been active in buying large Medicare practices, where such incentives are well-established. UnitedHealth bought one such company, XL Health, in 2012. TheStreet has ratings of A or higher for all the biggest insurers described in this article. 

Can the group keep it up? While the Kaiser Family Foundation reports the uninsurance rate is down, it's still at 13.4%, indicating there is more growth to come. The lessons of the individual market may now be applied to employer groups. With the ACA giving insurers more power to control what they pay out, it's likely that added business will be profitable.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates UNITEDHEALTH GROUP INC as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate UNITEDHEALTH GROUP INC (UNH) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, good cash flow from operations, largely solid financial position with reasonable debt levels by most measures and solid stock price performance. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • UNH's revenue growth trails the industry average of 16.9%. Since the same quarter one year prior, revenues slightly increased by 4.5%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Health Care Providers & Services industry and the overall market, UNITEDHEALTH GROUP INC's return on equity exceeds that of both the industry average and the S&P 500.
  • Net operating cash flow has increased to $1,408.00 million or 33.71% when compared to the same quarter last year. Despite an increase in cash flow, UNITEDHEALTH GROUP INC's average is still marginally south of the industry average growth rate of 37.96%.
  • The current debt-to-equity ratio, 0.52, is low and is below the industry average, implying that there has been successful management of debt levels. Despite the fact that UNH's debt-to-equity ratio is low, the quick ratio, which is currently 0.56, displays a potential problem in covering short-term cash needs.
  • Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.

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