Even If Obamacare is Killed, These Key Changes Will Live On

By David Sterman
June 13, 2012

We’re just days away from the Supreme Court’s landmark decision regarding the constitutionality of the Patient Protection and Affordable Care Act, better known as "Obamacare."

Whichever way the Court decides, however, a few key components of the healthcare overhaul are here to stay. Health insurance firms have already told us so.

In recent days, several of the nation’s leading health insurers -- Humana (NYSE: HUM)Aetna (NYSE: AETand United Healthcare (NYSE: UNH) -- announced plans to keep offering services that were part of Obamacare, including;

  • Free immunizations and screenings
  • The ability of young adults to stay on their parents’ policies until the age of 26
  • A more streamlined appeal process for coverage denials

Why would insurers offer services that cost them money or at least reduce profit margins? The insurers will tell you that it is a humanitarian gesture, a rare bit of altruism in an industry historically known for a ruthless bottom-line focus. Wall Street analysts will tell you that the insurers realized that a rollback in these services -- now that they have been offered for a year or two -- would be a public relations nightmare.

 

 

Why Make These Moves?

The truth lies elsewhere. The real reason is that these insurers are anxious to start establishing permanent policies and don’t want to see these services struck down by the Court only to have them re-established later, as they generally receive bipartisan support.

These insurers have seen their stock prices languish in recent years as investors have grown concerned about an increasingly murky outlook for profits.

"These insurers have seen their stock prices languish in recent years as investors have grown concerned about an increasingly murky outlook for profits."

By establishing permanent policies for these services, at least some of the murkiness will now be removed. Insurers now hope that the looming Supreme Court decision will bring some sort of final clarity to their industry, which will help curtail investor skittishness.

If that happens, investors may come to notice just how inexpensive these HMOs are valued. Take Humana as an example. Its shares have fallen roughly 20% since mid-January, pushing the company’s market value below $13 billion. That’s not much more than the insurer’s net cash position of $11.3 billion, meaning investors are assigning little value to Humana, even though the company has generated roughly $1.6 billion in free cash flow annually over the past three years.

To be sure, offering more services to customers while trying to keep a lid on insurance premiums has created some profit pressures. Humana is expected to see earnings per share fall in the 6% to 8% range this year to just under $8. Yet analysts expect the insurer to pass through modest premium increases in 2012 while curtailing costs elsewhere, which should push EPS back up to the $8.50 or $9 level.

So if profits remain OK and cash balances are robust, what are these insurers to do? Humana, Aetna and United Healthcare are all conducting massive stock buyback programs to reduce their share counts.  And a lower share count always means higher earnings per share down the road, all other things being equal.

The Investing Answer: Investors are afraid to touch healthcare stocks until the Supreme Court hands down its decision. When that happens, analysts spot a quick rally coming for these stocks as the near-term uncertainty is removed.

Yet you should know that these stocks are likely more of a trading opportunity than an investment. They are moderately undervalued now and look set to rebound in the near-term, but longer-term industry pressures are unlikely to abate.

Even as both major political parties differ on how to fix our broken healthcare system, it’s broadly understood that we pay a lot of money for mediocre levels of service. So look for more cost containment pressures for this industry, regardless of who occupies the White House next January.

Related stories from InvestingAnswers.com: If Obamacare Isn't Killed, These Companies Should Win Big; Before You Donate to Obama or Romney Online, Read This First