Obamacare Part I - Will Insurance Companies Survive?

Jul. 02, 2012 11:16 AM ETAET, CI, HUM, UNH, ELV53 Comments
Deja Vu profile picture
Deja Vu
122 Followers

Making Money of Off Obamacare:

Part I - The Health Insurance companies

I have been reading the business and popular media for the last few days and I'm struck by how poor both are at explaining the implications of Obamacare for various stake holders in the health industry. I'm writing this multi part series to enable SA readers to choose their investments wisely in the health care sector after implementation of Obamacare.

The first part of the series, deals with the health insurance companies like Aetna (AET), Coventry Health (CVH ), UnitedHealth (UNH), Cigna (CI), Wellpoint (WLP) and Humana (HUM). In a nutshell, my thesis is that health insurance companies are dead men walking and the most profitable course will be buy long term puts on any upticks. The key risk factor is that Obama might lose the election and republicans might regain the house and senate and repeal or delay Obamacare.

Why do we need to worry about the survival of the quite profitable health insurance companies? The media will usually mention things like 80% of premiums have to be paid out, no lifetime caps on benefits keeping kids until age 26 etc. However these are manageable burdens. There are three probably insurmountable risks that are not well explained in the media. One is the The reinforcing spiral, the second is the Accountable Care Organization (ACO) and the third is the Commoditization of Policies.

The Reinforcing Spiral

Obamacare means that insurance companies will have to cover people with pre-existing risks starting in 2014 (see Title I, Section 1101 of the ACA, pages 47-48). The individual mandate is meant to ensure that individuals buy coverage or face a penalty. Obamacare also mandates that all employers with more than 50 employees provide health coverage or face a penalty. On the surface this seems

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Deja Vu profile picture
122 Followers
Engineering degree from the Indian Institute of Technology Madras. MBA from the Booth School of Business at the University of Chicago.

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