If You Like Your Health Insurance Stock, You Should Keep It

Includes: AET, CI, HUM, UNH
by: Kells Hetherington

As the owner of a few shares of UnitedHealth Group (NYSE:UNH), I was initially concerned when I heard millions of individual policies were being canceled. The Obamacare website was inaccessible to many who wanted to purchase insurance. But when I understood how Aetna (NYSE:AET), Cigna (NYSE:CI), Humana (NYSE:HUM) and UnitedHealth could mint money under Obamacare even in the face of millions of policy cancellations and a federal health exchange website constantly on the blink, I stopped fretting and started buying shares of UnitedHealth, Aetna and Humana.

Conflict of interest

Quality Software Services, Inc. (QSSI) was contracted in January 2012 to develop the Data Services Hub.

"For all [health exchange] marketplaces, the Data Services Hub will [verify] applicant information used to determine eligibility for enrollment in qualified health plans and insurance affordability programs."

In September 2012, UnitedHealth acquired QSSI.

"The quiet nature of the transaction, which was not disclosed to the Securities and Exchange Commission (SEC), has fueled suspicion among industry insiders that UnitedHealth Group may be gaining an advantage for its subsidiary, UnitedHealthcare."

In December 2012, Representative Darrell Issa (R-CA) and Senator Orrin Hatch (R-UT) sent a letter to Health and Human Services Secretary Kathleen Sebelius raising questions about UnitedHealth's involvement in QSSI. Quoting from an article in The Hill newspaper, the two congressmen summarized their concerns.

"'The prospect that a subsidiary of United-Health Group could have a role in calculating the reallocation of federal funds among rival health plans has unnerved some industry insiders. ... [One individual] ... compared [UNH's] purchase of QSSI to the New York Yankees hiring the American League's umpires...'"

The Washington Post reported one Senate aide as having said:

"In meetings with [The Centers for Medicare and Medicaid Services] CMS, the agency said it understood the appearance of a conflict of interest, but the agency did not view the contract as an issue since QSSI was just building a data hub and the hub wouldn't be holding any information."

The Post also reported, CMS did not monitor the acquisition of QSSI after the contract was awarded.

Website problems mean big bucks for UnitedHealth

The Data Hub contract was a big deal for QSSI.

"According to Bloomberg's latest available data, QSSI has annual revenues of $12.6 million and net income of $510,000."

But the company has received $150 million for its work thus far on the Obamacare website, and that revenue stream does not appear to be ending anytime soon.

In late October, it was announced QSSI would oversee all contractors involved in the Tech Surge to fix the Obamacare website - making clear QSSI will see many more millions from the federal government.

Canceled insurance policies are an opportunity to grow revenue

In letters Humana sent to alert policy holders in canceled plans about their situation, the company also said it would automatically enroll them in other coverage unless they opted out, which meant taking very specific actions before certain deadlines. Talking Points Memo reported on one such experience with Humana.

"A 56-year-old Seattle resident with a 57-year-old husband and 15-year-old daughter, Donna had been looking forward to the savings that the Affordable Care Act had to offer.'

"But that's not what she found. Instead, she'd be paying an additional $300 a month for coverage. The letter made no mention of the health insurance marketplace that would soon open in Washington [state], where she could shop for competitive plans, and only an oblique reference to financial help that she might qualify for, if she made the effort to call and find out."

Automatic enrollment would have cost her $1,000 per month.

The wait and see approach

Aetna, Cigna, Humana and UnitedHealth will participate in just a few exchanges in the first year of Obamacare. The companies fear the long-term uninsured will sign-up and cost more to insure than their premiums.

"Cigna and UnitedHealth will each offer individual exchange plans in fewer than half a dozen states. Aetna, which earlier this year had said it would participate on the individual exchanges in up to 14 states, has since exited from seven."

The companies therefore should suffer no lost revenue from the Obamacare website fiasco.

Obamacare's insurance for insurance companies

The authors of Obamacare attempted to shelter insurance companies from the risk of "adverse selection" - this is basically the problem of too many sick people all buying insurance without enough of the healthy people also buying insurance to offset the losses. The law seeks to protect insurance companies from this in 3 ways.

First, Obamacare includes a reinsurance program to cover all exchange participating insurance companies.

"Under this program, payments will be made to non-grandfathered individual market plans (inside and outside the exchanges) that cover high-risk individuals. The funds for those payments will be collected from all individual and group plans, including grandfathered plans and self-funded plans."

The reinsurance program hopes to establish a $10 billion pool of money to help insurance companies when their losses exceed set amounts.

Second, the law protects insurance companies through something called Risk Corridors.

"Risk corridors are used to mitigate the pricing risk that insurers face when their data on health spending for potential enrollees are limited. In general, the risk corridors provide a government subsidy if insurer losses exceed a certain threshold. They also are used to limit an insurer's gains-plans would pay the government if their gains exceed a certain threshold."

And finally, insurance companies are protected on a regional basis through Risk Adjustment. This works as follows - if I am an insurance company participating in Obamacare in say Connecticut, and everyone we sign up needs open heart surgery, well then, the other insurance companies operating in the state must pay us money. (The government is responsible for these payments between insurance companies.)

Health insurance stocks

The health insurance industry is a good place for new money. Obamacare will act as a hedge for the next two years, protecting insurance companies from extreme losses, while simultaneously keeping them from making extreme profits on certain products. However, the positives far outweigh the negatives. And companies allowed to sell old plans for one more year and required to include in plans insurance for things people will never need, makes this a wonderful industry to be invested in.

Disclosure: I am long UNH, AET, HUM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.