Despite all the complaints about “Obamacare” health insurers have done very well this year. They are now in the “open enrollment” period that will decide their financial fates for 2012.
There are two trends investors should watch in this period, insurers seeking to serve Medicare patients profitably, and the rise of Health Savings Accounts that turn insurers into bankers (and, to some extent, bookies).
The first new key to profitability is the ability to serve Medicare patients, both directly and through “Medigap” plans. That means keeping old people satisfied and alive at the minimum possible cost.
This has led to deals like WellPoint's (WLP) purchase last year of CareMD,, which claims more front-end care for such patients means fewer expensive hospitalizations, and Humana's (NYSE:HUM) pick-up of MD Care, which is in the Medicare Advantage market. The Humana deal caused Oppenheimer to upgrade the stock, along with that of Healthspring (Pending:HS), this morning.
Ground zero for these new business models is southern California, which has fairly strict regulations, lots of seniors, and intense competition. It's like the song “New York, New York.” Insurers feel that if a company can make it there they can make it anywhere.
In the under-65 market the big play for insurers these days is high-deductible plans, combined with Health Savings Accounts (HSAs). These plans now have 17% of the market, with companies like GE (NYSE:GE), JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) making them the only option.
In this plan the insurer is more like a bank, with its exposure (and profitability) more limited than in regular insurance plans.
Conventional plans have almost disappeared, says the Kaiser Foundation, replaced first with preferred provider plans that gave insurers a better handle on costs, and now with HSAs or Health Reimbursement Accounts (HRAs). Employees can benefit if they don't use all the money available, or there could be a rush to providers at the end of the year if contracts call for employers to take the money back. The risk in these cases is not all on the patient. Hospitals say that when patients exceed coverage they may not be paid.
The question investors have to ask is whether health savings accounts can become a profit center, or whether getting costs in line with Medicare offers more long-term opportunity.
I'm betting the latter. I think the HSA boom is a short-term solution that will fail because it puts patients' thumbs on costs, and those thumbs are inadequate to the task. That makes WLP, HUM and HS the best bets in the health insurance space.