Health Insurance

No matter what happens to health reform, these insurers can turn a profit in Medicare, Medicaid

Key Points
  • Citi upgraded insurers Humana and Aetna to a buy.
  • The insurers have the potential to see greater profits in their Medicare and Medicaid businesses, Citi said.
  • Hospital stocks were also trading higher Wednesday.
Analyst: I think Senate health-care bill will go through

The large for-profit insurers and hospitals will still find ways to grow their businesses, whether or not the GOP's health-reform bill is passed this summer, analysts said.

On Tuesday, the Senate delayed a closely watched vote on the bill, which will impose deep cuts in spending on Medicaid.

In the wake of this news, analysts at Citi initiated coverage of insurers Humana and Aetna with a buy rating, saying the firms have the potential to see greater profits from their Medicare and Medicaid businesses.

"When you step back from the uncertainty created by the current political landscape and consider the larger economics around how managed Medicaid helps states to save money and improve outcomes, it is likely to continue to be an indispensable piece of the solution for the future of health care," wrote Citi analyst Ralph Giacobbe in a research note.

Aetna now derives 13 percent of its revenue from Medicaid, the safety net health program for the poor, and the health insurer is looking to gain market share in the program, with recent contract wins in Nevada and Virginia, as states look for ways to stretch health-care dollars, Giacobbe said.

Humana already derives about 80 percent of its revenue from the Medicare market, yet despite its dominance, the Citi analyst said, there remains room for growth as more baby boomers reach age 65 and qualify for the government health insurance program.

"We expect Humana to capture more than its fair share of this market growth and see the current government backdrop as relatively supportive of Medicare Advantage," Giacobbe wrote.

Just over one third of seniors now are enrolled in private Medicare Advantage health plans, but analysts expect that new retirees will increasingly be drawn to the plans that work more like employer plans rather than traditional Medicare.

On the other hand, they say the potential for a regulatory boost to growth in MA is more uncertain.

"Republicans have also historically been more in favor of privatizing parts of Medicare and this continues to remain a key pillar for House speaker Paul Ryan, although given recent hurdles around Republicans repeal and replace efforts realization of this goal near-term is likely off the table," Giacobbe said.

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If the Republican health-reform bill is passed, insurers and other sectors in the industry would see a near-term boost to profits from the repeal of Obamacare taxes. Also, in the case of insurers, some requirements to spend a minimum amount of premium revenue on medical costs.

"Managed care and hospitals of late... have rallied on the potential of the Senate bill," said Ana Gupte, Leerink Partners analyst, on CNBC's "Squawk Box" Wednesday, adding "I do think the Senate bill is going to go through."

While the GOP plan will cut deeply into federal funding for Medicaid expansion and the program's overall funding longer-term, the biggest immediate impact will fall more heavily on the not-for-profit hospitals, Gupte said.

"The names that are publicly traded — Tenet, HCA, in particular — have not had exposure to states that expanded Medicaid," she said, adding that she had recently raised her price targets for the two hospital operators' stocks, along with that of Lifepoint Health.

From an investor perspective, Gupte said, hospitals in states that did not expand Medicaid could actually see reimbursements for the program boosted near-term because the current Senate bill would reverse "budget reductions they saw" under Obamacare.

Hospital stocks were among the day's best gainers in the health care sector; Tenet Healthcare and Community Health both gained more than two percent. HCA and Lifepoint rose more than one percent.

Shares of Humana and Aetna led insurance gains, following the Citi initiation, rising about one percent.