Health Insurers May See Profits Shrink With ObamaCare

by: Stock Traders Daily

By Barry S. Cohen, Stock Traders Daily

Large health-insurance companies could see thinner profit margins as a result of fees and restrictions imposed by the 2010 Affordable Care Act. Any chance that President Obama's sweeping changes to the U.S. health-care system would be overturned fell by the wayside with Gov. Romney's defeat. At the same time, smaller firms serving primarily Medicaid customers could see earnings boosts as a result of the new law.

ObamaCare, as it's become known, imposes fees and restrictions on insurers, and it cuts funding for Medicare Advantage, the privately run version of the government's Medicare program for the elderly and disabled. Investors seems to be concerned that insurers could be stuck with skinnier profit margins from the business they gain via new online exchanges that will be set up to help people buy coverage.

That could be bad news for the largest U.S. medical insurer, UnitedHealth (NYSE:UNH), as well as other big industry players Aetna (NYSE:AET), Wellpoint (NYSE:WLP), Cigna (NYSE:CI) and Humana (NYSE:HUM). These companies could be facing profit limits and new taxes to help pay the cost of expanding health-care coverage to as many as 30 million uninsured people starting in 2014.

However, a couple of analysts say the impact on the insurers might not be so onerous. Bernstein's Ana Gupte, for instance, said in a research note that the risk of thin profits in the commercial business is manageable and already priced into company stocks. Among her favorite picks are Aetna, Humana and UnitedHealth.

Citi analyst Carl McDonald agrees, believing the overhaul is already cutting funding for Medicare Advantage plans, and he doesn't think the program will see additional cuts. Even if they do happen, McDonald said health insurers' profitability won't necessarily be hurt much.

Among health insurers, two smaller firms may benefit from the health-care law. St. Louis-based Centene Corp. (NYSE:CNC) and WellCare Health Plans (NYSE:WCG), headquartered in Tampa, Fla. both focus largely on Medicaid, the joint state- federal program for the poor. The health law expands the system, accounting for half of the new people to be covered. As a result many cash-strapped states could turn to private contractors like Centene and WellCare to handle much of the growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: By Barry Cohen, writer for Stock Traders Daily. Neither Mr. Cohen or Stock Traders Daily receives compensation from any of the companies mentioned herein for writing this article.