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Wednesday, January 30, 2019

Wall Street is betting on health insurance industry

Publicly-traded health insurers are performing better financially than other healthcare industry players, and that’s unlikely to change any time soon, according to a panel of Wall Street analysts at a Nashville Health Care Council event on Wednesday.
Last year, the average managed care stock price was up about 18%, driven by steady medical costs growth and the ability to price higher than those costs, said A.J. Rice, managing director at Credit Suisse.
“That’s been one of the main sources of upside, is the spread widening what their pricing for and what they’re actually realizing,” Rice said.
Health insurers’ bottom lines are benefiting from increased enrollment in government programs, including Medicare Advantage, which is being driven by an aging population that is increasingly choosing privatized Medicare over the traditional program. Although many states have transitioned their Medicaid beneficiaries to a managed care model, there are still a number of states that have not, Rice said.
And while health insurers are enjoying a period where the economy is relatively stable and plan members aren’t over-utilizing healthcare services, the same dynamic is weighing on the earnings of acute-care hospitals.
Hospitals and other provider facilities are seeing fewer patients, as health insurers steer plan members to lower cost settings and more people enroll in high deductible health plans, said Ana Gupte, a managing director at Leerink Partners. But hospitals are raising their prices, which is helping to offset the lower patient volume.
“The pricing growth has been quite surprisingly good all of 2018,” Gupte said. “I think we’re getting pretty comfortable that it’s going to continue into 2019.”
Interestingly, John Ransom, managing director at Raymond James & Associates, said that while big pharma is taking heat from Congress and the public over rising drug prices, per capita drug costs have increased between just 1% and 2% in the last three years.
“The (cost) trend that’s the most behaved in the sector that’s got the most problems is catching the most hell in D.C., which I find to be out of sync,” Ransom said, adding that medical device makers’ prices are also deflating.
Ransom doubted that the Trump administration would accomplish much in the way of reducing drug prices.
Over the course of 2019, analysts expect to see more mergers and acquisitions play out in several sectors. Despite two recent vertical mergers uniting Aetna with CVS Health and Cigna with Express Scripts, Gupte said there’s still limited room for some horizontal deals and “pockets” of vertical consolidation as companies strive to maximize their market share in Medicare Advantage and Medicaid, in particular.
Centene Corp., Wellcare Health Plans and UnitedHealth Group are likely acquirers in the Medicaid space, while Anthem could pick up another Medicare Advantage plan, Gupte said. Health insurers may also attempt to buy a home health or hospice company, which could help them tamp down members’ healthcare costs by keeping patients out of the hospital. Humana, for example, acquired stakes in home health company Kindred Healthcare and hospice company Curo Health Services with that goal in mind. Consolidation among outpatient healthcare providers is also likely to continue, she said.
Rice noted that while antitrust enforcers under the Trump administration haven’t been very tough on big mergers, deals are taking a long time to gain approval from regulators, which raises the costs of doing the deals. UnitedHealth’s proposed acquisition of DaVita Medical Group, first announced in December 2017, still hasn’t closed.
He predicted that health insurers’ earnings growth would increase by low to mid-teen percentages over the next year or two. All the concerns from an equity analyst perspective, including trade and tariffs, rising interest rates and the potential of a economic recession—aren’t like to hurt managed care companies, Rice said. And if anything, rising interest rates will only benefit insurers’ investment portfolios.

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