After the recent introduction of healthcare reforms, the health insurance industry in the U.S. is expected to benefit from rising demand. Healthcare reforms such as the formation of health insurance exchanges and the government providing health insurance to citizens who cannot afford it will be the primary contributors to this growth. These reforms are expected to add 25 million U.S. citizens to the overall health insurance market. Three U.S. health insurance companies are positioning themselves to capitalize on the potential growth in U.S. demand for their respective health insurance products.
New opening with healthcare reforms for WellPoint (WLP)
WellPoint is the second-largest health insurer in the U.S. The company is expected to benefit from newly introduced healthcare reforms by President Barack Obama. One of these reforms include providing health insurance to people who previously couldn’t afford it. Federal and state governments will fund this scheme jointly.
Another reform includes introduction of health insurance exchanges, where different companies will compete against each other to provide affordable health insurance plans to customers. These exchanges will open in October 2013 in different U.S. states and will offer health insurance products at a lower cost due to availability of tax credits for insurance holders and low administrative costs at the exchange.
WellPoint plans to expand its business by operating in the health exchanges of 14 states. These reforms are expected to bring growth for the company. Being the second-largest health insurer in the U.S., the company expects these reforms will provide additional revenue growth of $20 billion by 2016.
On the other hand, the company announced that it won’t participate in the California Small Business Health Options Program, or SHOP, exchange in 2014. This decision came as a bit of surprise as it has 31% market share in small group insurance in California. The company is expected to lose some of its 2 million current small group members in California, and thus, some of its market share to its competitors Kaiser Permanente and Blue Shield due to non-participation.
UnitedHealth Group (UNH) gaining from its recent acquisition
UnitedHealth Group posted revenue growth of 5% year-over-year to 31.7 billion in the first quarter of 2014. One of the main drivers for this increase was revenue growth from its Optum division. The revenue from this division grew 29% year-over-year to $11.2 billion in the first quarter. Operating earnings also grew 20% year-over-year. Optum deals in providing healthcare services. The division’s main growth contributor was the acquisition of Brazil’s largest health insurer, Amil Participacoes. The company added 2.7 million customers year-over-year in the first quarter.
This acquisition was completed last year and is now gaining from this acquisition. Amil Participacoes had a customer base of 4.7 million which was added as new customers to the company’s business. With the growing Brazilian health insurance market, it is expected that revenue from the Optum division will reach $40 billion in 2015, while its operating income will increase from $1.3 billion in 2011 to $2.5 billion in 2015.
The company is also betting big on healthcare reforms. The company expects to participate in the health exchanges of 12 states. Being the biggest health insurer in the U.S., the company expects to increase its enrollments over the next year. It is expected that the company’s total U.S. enrollments will increase from 187 million in 2012 to 189 million in 2014. Therefore, top line growth is expected from this these reforms. Looking at this at this potential growth in demand, it is expected that the company’s revenue will grow from $110 billion in 2012 to $128 billion in 2014.
Healthcare reforms are expected to bring growth in demand for health insurance in the U.S. Therefore, both the companies are taking initiatives to capitalize on this opportunity.
WellPoint’s potential demand growth from the overall healthcare reform is expected to minimize the revenue loss from California’s SHOP exchange. UnitedHealth’s acquisition of Amil will help it to gain from the rising Brazilian health insurance market.
Thus, looking at the industry's growth potential, I recommend a buy for these stocks.