A Possibly Fatal Blow To Private Health Insurance

by: Paul Franke

How will the end of federally mandated health insurance purchases in 2019 affect sector stock pricing?

The 2020 election may pivot on health care issues, with major changes to business valuations becoming reality for health insurance investors.

The passage of Medicare for All or a government-run single payer system may decimate the private health insurance marketplace into 2021.

The large 2019 sell-off in health insurance stocks may be just the beginning of escalating problems for investors.

Obamacare (the Affordable Care Act) has proved a boon for health insurance providers since 2010, as U.S. law mandated insurance purchases by ordinary citizens. However, can the industry survive today's push by liberal and socialist Democratic thinkers for Medicare for All? Quite simply, the answer is no. Health insurance businesses will not survive in their present form if the 2020 election proves a tipping point for greater government intervention in the way medical and health services are delivered and paid in America.

Already, in 2019, President Trump has eliminated the Obamacare requirement for Americans to purchase private health insurance if they are not covered by company or government plans. This simple change in the law may be the primary reason health insurance stocks have declined markedly during 2019. Health insurance companies are going to see a material drop in revenues later this year, mostly from healthier younger individuals dropping coverage. On top of this revenue problem, the remaining pool of buyers will be older, higher rate users of medical services. So, the industry is facing a double whammy as revenues drop and proportionally costs will start to climb dramatically in future reporting quarters. Undoubtedly, greater than normal premium jumps are approaching for everyone still buying into the private health care market by 2020, including corporations hungry to get out of the medical coverage cost spiral.

In 1993 when President Clinton pushed for greater government intervention into how the medical and health industries functioned, I was a big buyer and quite bullish on the large medical/pharmaceutical companies discounted in the related Wall Street sell-off. No group of individuals (voters) outside the working poor was in favor of such. How the tables have turned in 2019. Baby boomers as a group now understand the high cost of medical care and related insurance premiums. Millennials (Gen Y) and Generation Z surveys show numbers in the 70% range approving a single payer government-run health system, and Generation X characters like myself are getting serious about how retirement and U.S. health care will look in 10-15 years.

I have told everyone that will listen, Trump's election would be the best thing to EVER happen to radical left-wing ideas and socialists in general. His push to further enrich corporations and the affluent, at the expense of the working class, through higher deficit spending and escalating inflation rates will have consequences in future elections. 2016 was just the warm up act for radical liberals gaining seats in Congress, in my humble opinion. Already, nearly every one of the 2020 Democratic candidates for President is backing the idea of a single payer government health system, and voter surveys seem to lean toward approving such a plan in the near future.

Weak Stock Trading Momentum

Has the tank in health insurance stocks in 2019 been justified? My answer is yes, and much more selling is to come. The momentum part of my Victory Formation system is screaming investors avoid the sector right now. I am currently short CVS Health (CVS), Humana (HUM), and Cigna (CI). CVS just merged with Aetna in late 2018 and has been under pressure like Walgreens Boots Alliance (WBA) from a saturated pharmacy marketplace, including the entrance of Amazon (AMZN) into the healthcare arena. Other large-cap medical care insurance providers under pressure include Anthem (ANTM) and UnitedHealth Group (UNH).

Below are performance charts of the major health insurance companies at risk of having their business model and future earnings prospects ended by a single payer government system in 2021. If Democrats sweep Congress and the White House, I think it is likely many stocks in the health insurance area could undergo a price drop of 75% or greater in the next 24-36 months from current levels. The S&P 500 is used for comparison purposes, with time intervals from one month to ten years.

Notice the biggest health insurance companies have risen significantly over many years. The latest price drop in 2019 has barely dented their long-term gains. Also, CVS and Walgreens have been steep underperformers for several years, as pharmacy competition is heated and real. CVS, in particular, holds two problem children as businesses today, highly leveraged I might add. It's merger with Aetna came at the worst possible time in historical terms.


The majority opinion by Wall Street analysts, Seeking Alpha writers, and conventional wisdom logic is still quite bullish on the sector in April 2019, despite a host of fundamental problems lining up against the big health insurance companies. Many of these businesses have witnessed an extraordinary rise in price and valuation since Obamacare was enacted in 2010. Nevertheless, investors and analysts need to take a level-headed look at the future. Medicare for All and the threat of greater direct government intervention in private sector health insurance look to have increased odds of coming to fruition now vs. any time in recent memory. Reviewing the political landscape, given Democrats retake the Presidency and Senate in 18 months, I put the odds of a nationalized health care system at 50/50. If America enters a serious recession in 2019-2020, a landslide election of Democrats could push the odds above 75%, in my opinion.

If operating profitability in the sector is headed straight down in 2019-2020 from Trump dropping the mandate all Americans buy private health insurance or face a tax penalty, what is the upside in the sector going into the groundbreaking 2020 health care political debate?

Big business in America would love to get out of providing health insurance to employees. They would be all for moving this rising cost problem to Uncle Sam. If corporate America is for it, politicians are for it, and voters are for it, why not Medicare for All? Democracy will have its say. What if U.S. democracy votes private health insurance out of existence in November 2020?

Many are convinced government-run health care will never happen in the U.S., despite the reality, Medicare, Medicaid, and Veterans programs take a bigger share of total health care expenditures each year. Combined, the three government programs accounted for better than 30% of all health care spending in the U.S. during 2017. It is likely in ten years, health care spending will be the largest federal government expenditure by a wide margin, besting Social Security outlays, without any changes in law.

Most investors view the 2019 health insurance sell-off as a buying opportunity because underlying sector workings will never change. However, years from now, we may look back at today's low valuations on "trailing" profitability as a classic example of a value trap. Huge changes are afoot in the sector. Investors would be wise to do further research and carefully weigh the evidence of widening government intervention in the private health insurance marketplace.

Short Sale Suggestions: Please consult a registered financial advisor if you are contemplating a health insurance company short position. The unique risks of short selling, including the potential for unlimited losses, are different than holding a long-only position. Always short a diversified basket of stocks from a number of sectors to reduce the risk of one equity creating oversized losses.

Disclosure: I am/we are short CVS, HUM, CI. 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.