Investing in a business that provides the products and services people need is the smartest strategy. Nowadays, health insurance is one of the essential services. In this article, we will consider which insurance company stocks are worth paying attention to and how to choose health insurance stocks.
What you need to pay attention to when investing in US insurance companies
There are a number of factors, such as growth in revenue and earnings, that you should pay attention to no matter which stock you are considering. However, investors are advised to consider several factors before deciding to invest in shares of companies in the health insurance sector.
- Income structure.
Learn how the company generates most of its revenue. For example, some players are betting on Medicare Advantage, and some companies are focused on Medicaid or commercial markets. Studying this question will allow you to analyze the growth prospects of the company’s shares, as well as the possible risks.
- Medical care ratio (MCR).
This ratio (also sometimes called the medical expense ratio) measures medical expenses as a percentage of premium income. The higher the MCR, the less profitable the health insurance company is.
- Diversify beyond health insurance.
It is increasingly common for health insurance companies to diversify into other activities (and other businesses may diversify into health insurance). Pay close attention to other areas of health insurance companies, as they can significantly affect the potential growth prospects and risks of these companies.
Risks associated with shares of insurance companies
Like other businesses, health insurers face risks, including the threat of an economic downturn and increased competition.
However, health insurance companies face a number of unique risks. Let’s consider them.
- Legislative changes.
Health insurance in the United States is highly regulated at both the federal and state levels. The potential for major changes in legislation that will create problems for health insurers is a constant risk. For example, if the US introduces a single-payer health insurance plan in the future, some business opportunities of insurance companies can just disappear. On the other hand, some major reforms open up opportunities for health insurance companies. The Affordable Care Act (commonly known as Obamacare) expanded the Medicaid program, which increased the growth prospects for health insurers in that market.
- Payout Requirements
Even without major regulatory changes, health insurers are constantly facing potential pressure from insurers to demand payment of claims, which can lead to reduced profits. Companies must obtain premium clearance from state governments, which are reluctant to raise costs for residents of their states. The Medicare and Medicaid programs also set rates that can hurt health insurance companies’ revenues.
- Unforeseen medical expenses.
Insurance companies set premium rates based on anticipated medical expenses. However, there is always the possibility that health care costs will be much higher than expected. For example, the COVID-19 pandemic has created significant uncertainty for major health insurers and could potentially lead to a surge in medical costs. Instead, however, the pandemic has caused delays in emergency medical services, leaving health insurers’ costs temporarily lower than originally expected.
Big opportunities ahead
Even with the risks that health insurance companies face, there are big opportunities ahead. As baby boomers age, the demand for Medicare Advantage and additional Medicare plans grows.
President Joe Biden has already signed executive orders to expand the coverage of health care programs established by the Affordable Care Act and to have federal agencies work to make it easier to access those plans, as well as Medicaid. He also wants to expand Medicare to include an option to allow anyone to purchase health insurance and increase federal subsidies for Obamacare premiums.
As the new president’s administration focuses on significant federal health care reforms, Medicare and Medicaid health insurance stocks should perform reasonably well over the next few years.
Best health insurance stocks to buy in 2022
UnitedHealthGroup (NYSE: UNH) is by far the largest health insurance company in the world. Its UnitedHealthcare division provides customers with health plans and is a major player in the U.S. Medicare Advantage, Supplemental Medicare, and Medicaid markets. Its business segment (Optum) provides health information and technology services, including OptumRx PBM services. While the company generates more than three-quarters of the total revenue, its business segment is the main growth driver for the Group.
Anthem (NYSE: ANTM) is four times less than UnitedHealth Group in terms of market capitalization but is also one of the largest health insurers. Anthem operates Blue Cross and Blue Shield plans in 14 states but it can sell health insurance throughout the US. It operates in the same arenas as the UnitedHealth Group, including Employer and Individual Health Plans, Medicare Advantage, Complementary Medicare, and Medicaid. Anthem also operates a pharmacy benefits manager (PBM) organization called IngenioRx, which accounts for about 18% of the company’s total revenue.
CVS Health (NYSE: CVS) – you could think of CVS as a retail chain of pharmacies (and it really is). However, the company also operates one of the largest PBMs in the country, CVS Caremark. Thanks to the acquisition of Aetna in 2018, CVS is also a major health insurance company. The company’s health benefits segment, made up primarily of Aetna, generates more than a quarter of CVS’s total revenue. While all three leading insurance stocks pay dividends, CVS Health offers the most attractive dividend yield in its group.
One way to buy all of these insurance stocks on the exchange (and many others) at once is to invest in an exchange-traded fund (ETF). While you won’t find an ETF that focuses solely on health insurers, iShares U.S. Healthcare Providers (NYSEMKT: IHF) comes pretty close.
This fund tracks the performance of the Dow Jones U.S. Select Healthcare Providers Index, which includes US health insurance, diagnostics, and specialty treatment companies.
The insurance sector in the US has shown strong growth over the past year and even outperforms the NASDAQ 100 as the economy recovers from the crisis. Investing in insurance company shares is a conservative strategy designed to continue economic growth. But for a period of rising rates, it becomes protective. You can discover many interesting health insurance stocks in the Gainy app. It helps investors to monitor updates, trends, and market fluctuations.