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2017-03-19 16:04:02
Strategies: Gripes About Obamacare Aside, Health Insurers Are in a Profit Spiral

Over the last few years, big managed care companies like UnitedHealth Group have contributed to the furor over the fate of the Affordable Care Act by saying that important parts of it are fundamentally flawed.

But Obamacare hasn’t been a curse for the managed care companies. Over all, based on their share performance, it has been something of a blessing.

Since March 2010, when the Affordable Care Act was signed into law, the managed care companies within the Standard & Poor’s 500-stock index — UnitedHealth, Aetna, Anthem, Cigna, Humana and Centene — have risen far more than the overall stock index. This is no small matter: The stock market soared during that period.

The numbers are astonishing. The Standard & Poor’s stock index returned 135.6 percent in those seven years through Thursday, a performance that we may not see again in our lifetimes. But the managed care stocks, as a whole, have gained nearly 300 percent including dividends, according to calculations by Bespoke Investment Group.

UnitedHealth, the biggest of the managed care companies, with a market capitalization that is now more than $160 billion, returned 480 percent, dividends included. An investment of $100 in the company’s stock when Obamacare was signed into law would be worth more than $580.50 today.

“If Obamacare has been bad for the managed care stocks, why have they performed so well under it?” asked Paul Hickey, a founder of Bespoke Investment Group. “And do they really need to be rescued by Congress?”

The answers are complex but boil down to this: Basically, several analysts on Wall Street and in Washington said, the underlying businesses of the big managed care companies have actually done extremely well under Obamacare. They have run into some problems but are hardly in need of a rescue.

The companies have notched profits — from expansion of Medicaid, for example, and from services aimed at cutting medical costs — while learning how to insulate themselves from parts of the law that have crimped their income. They have diversified, earning money from businesses that include data management, outpatient clinics and surgical services, as well as traditional health insurance.

“The successful managed care companies, and UnitedHealth in particular, have figured out how to prosper in almost any environment — and to insulate themselves from issues that become a problem,” said Gary Claxton, director of the health care marketplace project for the Kaiser Family Foundation, a nonprofit dedicated to health care policy. “They are making a lot of money from government programs like Medicaid and Medicare — and they are likely to keep doing so,” he said, regardless of what happens in Washington.

UnitedHealth, the industry bellwether, has reduced its exposure to what was its biggest problem in Obamacare: money-losing insurance that it sold in public exchanges to individuals, who often received government subsidies.

Last April, it announced that in the face of mounting losses from individual policies sold in public exchanges under Obamacare, it would radically cut its participation in those markets. It disclosed in its annual report in January that in 2017 the company “will participate in individual public exchanges in three states, a reduction from 34 states in 2016.” It also said that it would shed more than $4 billion in revenue from them, in an effort to cut its losses.

With those kinds of problems, you might think that the stock market has looked with disfavor at UnitedHealth and its competitors, and that investors have been counting on Congress to repeal Obamacare and replace it within something more palatable for the insurers.

But that assumption, which I made before looking at the performance of the companies’ shares, couldn’t be further from the truth.

UnitedHealth has bolstered its position, first by abandoning those profit-sapping exchanges wholesale. That move may have troubled the stock market, because it may seem to suggest that the company was giving up on what had been an important growth opportunity.

But a second maneuver, an accounting one, helped its standing in financial markets immensely, said Sheryl Skolnick, director of United States equity research for Mizuho Securities. In November 2015, UnitedHealth made an adjustment on its balance sheet, setting aside an initial “premium deficiency reserve” of $200 million for expected losses in those marketplaces.

Those losses have cumulatively swelled to more than $1 billion, Ms. Skolnick said, but because they have been segregated in the company’s accounting, and because the company has been leaving those markets, investors have been able to easily assess the company’s value “entirely separately from the problems it’s had with the exchanges,” she said. Other managed care companies have made similar provisions.

Wall Street has rewarded companies like UnitedHealth for steadily increasing profits in other businesses, and generally hasn’t penalized them much for the public exchange losses, Ms. Skolnick said.

UnitedHealth’s share price, in other words, has been relatively unscathed by its problems with Obamacare public exchanges, even as its statements about the unprofitability of the exchanges made headlines and contributed to public perceptions that Obamacare is in deep trouble. (The Congressional Budget Office indicated Monday that some of these fears are overblown: The public exchange markets, it said, “would probably be stable in most areas under either current law or the legislation” to replace Obamacare in the House of Representatives.)

In Ms. Skolnick’s view, the Affordable Care Act could indeed use some modifications, but the fundamental problem with the public exchanges is one of “adverse selection,” in which relatively sick people have occupied an outsize part of those markets, making it difficult for insurance companies to come up with profitable pricing. But the root cause is that the “mandate,” the requirement that everyone buy health insurance, is too weak, she said, not too strong. The House legislation would make matters worse by imposing a surcharge for people who have let their insurance lapse. “I think that’s weaker,” she said.

There are plenty of good things in Obamacare for these companies. The expansion of Medicaid has been a boon for them, said Lance Wilkes, an analyst with Sanford C. Bernstein. “It’s not a high-margin business for the managed care companies, but it’s a steady one and it has been a growing one,” he said. The companies offer insurance to low-income residents in various states under Medicaid, he said, while Medicare plans for older people have also been a growth area.

Mr. Clarkson of the Kaiser Family Foundation said, “As the baby boom population ages, people are leaving their workplace health care plans, which have been steady and profitable for the managed care companies but aren’t growing, and going on Medicare in big numbers, and companies like UnitedHealth see this as an opportunity.”

Direct government premiums from Medicaid and Medicare amount to 25 percent of UnitedHealth’s revenue, and the company is moving rapidly into other areas: In January, it announced the $2.3 billion purchase of Surgical Care Affiliates, an outpatient surgery chain, as part of an aggressive move to provide direct medical services.

Expanding portfolios of businesses and deft moves to stanch losses may be why the managed care companies have, for the most part, been favored by the stock market. (The industry has endured some thwarted mergers — between Aetna and Humana, and Anthem and Cigna — and continuing headaches from public exchanges.)

Paul D. Ryan, the speaker of the House of Representatives, has said repeatedly that Obamacare is in a “death spiral.” That’s a debatable proposition. But it seems irrefutable that the big managed care stocks are in a different kind of spiral — a profit spiral — that is twirling upward.