What can happen to your portfolio if Trump overturns Obamacare? A lot…
In early March, Donald Trump announced his seven-point plan for healthcare reform, part of his platform to “make America great again.” Like many Republican politicians, the heart of his plan pivots on the repeal of the Patient Protection and Affordable Care Act, better known as Obamacare.
With a Trump presidency becoming more credible each day, it’s a good time for investors to consider a nation without Obamacare. Which companies will be impacted the most?
Currently, there are two important mergers in the health insurance industry that will reduce the number of major players from five to three.
Let’s take a look at how a reversal of Obamacare might affect these companies and their shareholders.
The $37 billion deal between Aetna and Humana is expected to close by year-end, despite heavy governmental scrutiny. Both companies experience problems profiting under Obamacare.
Humana recently announced a precipitous drop in its first-quarter profits, partly due to a decrease in ACA signups. The company said it will pull out of public exchanges in several states beginning next year.
Humana also has issues with its Medicare programs. Last year they paid a $3.1 million fine (the largest fine levied that year) over mismanagement problems cited by a government audit.
Despite previous losses tied to Obamacare, Aetna decided to remain in its current 15 public markets. Looking ahead, the insurer expects no additional losses this year, and could expand its offerings if all goes well. Though willing to stick it out, Aetna CEO Mark Bertolini said that the ACA law needs tweaking to make the marketplace attractive to insurers.
Also under the regulators’ microscope, Anthem’s $47 billion purchase of Cigna should close later this year or early next. When the new company finally emerges, it will be the biggest health insurance company in the U.S.
Of the two companies, Cigna struggles with Obamacare the most. Late last year, CEO David Cordani noted that Cigna had not made any money on the exchanges during the first three years of enrollment. Nevertheless, he insisted that the company would not exit the marketplace.
Cigna’s share of the ACA market is small, less than one-quarter million customers out of a pool of 10 million.
Cigna has other problems, as well. Its Medicare segment came under fire earlier this year when the government agency suspended new customer marketing enrollment. At issue were glitches in the company’s administration of drug benefits, as well as its consumer complaint and appeals program.
Cigna’s Medicare program was the principal reason for Anthem’s interest in the company, reflecting the latter’s desire to expand its Medicare Advantage market share.
UnitedHealth Group (NYSE:UNH)
Currently the largest U.S. health insurance provider, UnitedHealth has myriad problems navigating the ACA landscape. After losing $720 million in 2015, the company expects to lose another $650 million this year. Recently, management announced that UNH would be leaving all but a few state exchanges by 2017.
It’s unclear why UnitedHealth had such a lousy experience with Obamacare relative to other insurers. The problems UNH cited no doubt plague others, as well: Younger, healthier people aren’t signing up as expected, leaving sicker, older folks to make up the lion’s share of customer sign-ups. Additionally, some customers sign up right before they need expensive care and leave the plan soon afterward.
Some analysts see UnitedHealth’s foray into the exchanges as part of its problem. The insurer was slow to join in 2014, entering markets in only four states. It jumped in feet first in 2015 when new sign-ups were heavier users of health services than prior groups.
In addition, UNH concentrated on selling pricier health plans on the exchanges and failed to price their plans appropriately.
Bigger Really Is Better
UnitedHealth would likely be the happiest to see Obamacare disappear, even though that business represents a small part of its revenue stream.
Once their mergers are complete, both Aetna and Anthem will also be in a stronger position, thanks to their expanded Medicare Advantage programs.
All three big insurers would also have more latitude to drop the least cost-effective customers acquired through the exchanges and raise premiums to recoup losses during the Obamacare years.
Even if Trump wins the election, there’s still a chance that Obamacare is here to stay. Nevertheless, these companies will still be a good investment.
Insurers requested premium hikes for next year, and a recent study by The Kaiser Family Foundation suggests that increases for 2017 may be higher than in previous years. With UnitedHealth exiting the exchanges, Aetna and Anthem will be better positioned to gain more market share.
Whether or not Obamacare remains the law of the land, the sheer size of these three companies will enable them to dominate the health insurance market.
For investors, health care stocks have performed admirably over the past few years and are likely to continue to do so—the Bureau of Labor Statistics identifies the healthcare sector as one of the fastest-growing industries in the U.S.
In addition, Fidelity Investments notes that consolidation in the industry has been a contributor to shareholder value.
Whatever the fate of Obamacare, the future of these healthcare insurers looks profitable and secure.