Healthy Returns for Health-Care Stocks

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by Nikhil Hutheesing


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Investors in health insurance companies have had plenty to cheer about this year. The S&P 500 Managed Health Index, which includes UnitedHealth Group, Cigna Corp. and Aetna Inc., is up 20 percent as of May 31. That compares to an increase of 14 percent for the S&P 500.

The rise in the stocks of major health insurance companies follows a strong performance in 2012, when the S&P 500 Managed Health Index  rose nearly 16 percent, compared to 13.4 percent for the S&P 500. The key drivers then were mergers and acquisitions and an improved drug approval process by the FDA.

This year, health stocks were boosted partly by the Affordable Care Act, which should help bring some 27 million new customers into the health-care system over the next few years. Online m arkets for health insurance are set to open in states across the country on October 1. The idea, according to Healthcare.gov, which is managed by the U.S. Department of Health, is that you will be able to go online to compare insurance options based on price, quality and other features when the new health laws take effect in 2014.


It all sounds good, except for one thing: Health insurers aren't exactly jumping to participate in new markets. UnitedHealth Group, for example, says it will offer coverage in just a dozen of the newest exchanges. At a meeting in California last week to announce the companies chosen to sell in the state's exchange, three big health insurers were notably absent. UnitedHealth, Cigna and Aetna had chosen not to bid.



While the insurers are likely taking a wait-and-see approach, one fear is that the exchanges won't do what they were intended to do: provide people with more health insurance choices. Aetna, for example, says it plans to sell in 14 states and reserves the right to withdraw from markets where hospitals or regulators demand rates that it deems unreasonable. UnitedHealth plans to offer coverage in just a dozen of the exchanges. 


  
While investors have been enthusiastic about a growing customer base for the insurers, taking those customers on gradually, rather than all at once, is a welcome approach. WIth 27 million new customers also come uncertain costs, says Sarah James, a Wedbush Securities analyst. She points out that taking on many sick customers quickly could be overwhelming to insurance companies. Shares of UnitedHealth are up 15.5 percent this year. Shares of Cigna are up 27 percent and Aetna has seen its shares rise more than 30 percent.

This doesn't mean the exchanges won't work. It does mean that they may be slower than expected to get started, that the choices for people looking for plans may be less than hoped for and that, possibly, the rates for insurance won't be all that low, at least not until there is more competition. Joseph Swedish, the chief executive officer of Wellpoint Inc., explains that it could take a while before the exchanges are truly useful. "We view this process as a marathon, not a sprint, " he told Bloomberg.