Managed health care stocks will be a bright spot in the fourth-quarter earnings season, according to Peter Costa, Senior Equity Analyst at Wells Fargo.
Costa co-wrote Wells Fargo's earnings preview and 2012 outlook for the managed-care sector, and tops his "recommended" list with Aetna and UnitedHealth .
Wells Fargo estimates earnings per share for UnitedHealth to be $1.06 in the fourth quarter, and $5.00 for the fiscal year 2012 — each higher than consensus estimates. The health insurance company announced fourth-quarter earningsThursday, January 19.
For Aetna, Costa's firm estimates fourth-quarter earnings per share will be 95 cents, and $5.20 for 2012 — also above consensus. Aetna will report earnings Wednesday, February 1.
Why so bullish? Costa says these two insurers are well-positioned to take advantage of rising "unit costs" [what patients pay per service], lower unemployment and even health-care reform.
In 2011, UnitedHealth Group's unit cost trend was 5.5 percent. In 2012, Costa expects its costs to trend up to at least 6 percent.
This small increase will ripple across the entire sector, because "unit" costs are "the biggest factor in health-care cost trends," says Costa, "including hospital visits, physician care, pharmaceuticals, and outpatient care."
January's lower 8.5 percent unemploymentfigure should also give these companies a boost in 2012, if it stays at this level, and especially if it continues falling.
"Enrollment for insurers is a function of the employed market. The more people are employed, the more members are paying premiums for health insurers," said Costa.
But the health-care reform bill, passed by Congress in 2010, gave insurers an incentive to outperform in a way that could sidestep fluctuations in costs and unemployment.
"Aetna and UnitedHealth are attempting to become leaders in 'accountable care organizations.' They were part of Obama's health-care reform — and the idea is for providers to form narrow networks and create shared systems offering lower-priced products and services," says Costa.
While it's not yet clear how accountable care systems will ultimately achieve lower costs, Costa says the shift is already happening.
"The private health-care industry is migrating towards these kinds of structures, by sort of copying the strucuture that traditional Medicare has."
Health-care reform has also added to Costa's positive outlook, since it left the political hotseat.
"With one year of the new health reform law behind us, and since shares in the group mostly advanced last year, we believe fear of the most negative aspects of the reform have subsided."
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Wells Fargo Securities maintains a market in the common stock of Aetna, Cigna, Humana, Coventry, UnitedHealth Group, and WellPoint. Peter Costa does not personally own stock in these companies.