Only Obamacare Contrarians Should Bet on Anthem

Investors who think the negative headlines that Obamacare has recently received are overblown might be tempted to view the opening of enrollment today as an investment opportunity. To be sure, premiums are on the rise and the participation of some large insurance companies is declining. But that's not a complete picture of the system's prospects. The problem for any investor wanting to bet on its success is that the companies involved in it are also facing a load of uncertainty.

Citizens who do not receive healthcare insurance through their employer and are not eligible for Medicare or Medicaid must sign up by Jan. 31 for insurance for 2017, or they will face a hefty fine. The fines could encourage more participation on the part of individuals and make the system more profitable. Meanwhile, for many participants, federal subsidies will offset the premium increases. 

That could make companies that continue to participate in the federal and state exchanges a more attractive investment.

Large insurers like UnitedHealthcare Inc. (UNH) , Aetna (AET)  and Humana (HUM)  have been abandoning federal and local governments on Obamacare.

Aetna announced that it would reduce its public exchange participation in 2017, from 778 counties to 242.The company will remain on the Delaware, iowa, Nebraska and Virginia exchanges, and declined further comment on its participation in the public exchanges.

The company's share price fell 1.4% Tuesday midday, reaching $105.78 per share.

Humana announced in June that in 2017 it would cut down its public exchange offerings to 156 counties in 11 states, down from 1,351 in 19 states in 2016. The company could not be reached for specifics on the states it would continue to operate in.

Humana fell 1.4% Tuesday midday, reaching $169 per share.

As those companies pull away, however, others, including Anthem (ANTM)  and Cigna (CI) , could stand to benefit, analysts say.

According to Sheryl Skolnick, an analyst at Mizuho Securities, Anthem will likely benefit most from the revenue gained from this year's open enrollment. The company was one of the few large insurers that has continued to participate in public exchanges.

"Anthem has had much more exposure to the individual market," Skolnick said by phone Tuesday. "It's more important to their business."

This is thanks to Anthem's Blue Cross Blue Shield offerings, which are most often seen as a last resort insurance plan. Anthem, which will remain the largest insurer on the most exchanges, could not be reached to confirm the number of states and counties it will offer plans.

Anthem shares fell 2.7% Tuesday by midday, hitting $118.57 per share. The company reports third quarter earnings on Nov. 2. 

Still, Anthem is currently embroiled in controversy over its proposed merger with Cigna, which, like the other big healthcare insurance deal between Aetna and Humana, is facing opposition for antitrust reasons from the Department of Justice. Both topics are likely to be the subject of conversation among Anthem analysts and management on Wednesday. 

Cigna, for its part, is expanding its offerings on the public exchange. Cigna officials said via email Tuesday that the company stills offer plans in Phoenix, Denver, Boulder, Colo., Colorado Springs, Colo., St. Louis, Kansas City, Nashville, and Memphis. The company will also offer plans throughout Maryland. And it will expand its offerings in 2017, adding Chicago, Raleigh, N.C. and Richmond, Va. to its list of cities covered.

The company's shares fell 1.5% Tuesday, reaching $117 per share.

And the deal between Cigna and Anthem would allow them to spread their costs over more plans. But Cigna no longer seems interested in pursuing the deal. Skolnick says the uncertainty over the outcome of the deals makes all these companies unattractive. 

She notes that UnitedHealthcare will likely be the least impacted by either the public exchanges or problems with the Department of Justice, making it an attractive investment in an unstable market.

UnitedHealthcare announced earlier in 2016 that it would be pulling many of its policies offered through public exchanges after reporting a debilitating loss on public plans. In 2017, the healthcare company is offering plans in Nevada, New York and Virginia.

It is the only mega-insurer that is not tied up in a merger at the moment.

"Unitedhealthcare is the only company that I see in the sector that doesn't have the distractions," Skolnick said. Skolnick has a buy rating and a $169 per share price target on the company.

UnitedHealthcare, following suit with its sector, fell slightly by Tuesday midday, reaching $140.35 per share. The company could not be reached for further comment.

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