Health Insurance

GOP Obamacare retreat will hit insurers on the tax front

Key Points
  • UnitedHealth said the return of the Obamacare health insurance fee next year will drag on its results.
  • Despite this, UnitedHealth shares rose Tuesday, as did the stocks of insurers most heavily linked to the Obamacare exchanges.
  • Aetna, Cigna, Anthem and Humana shares fell Tuesday.
UnitedHealth 'huge winner' in health-care stalemate: Jim Cramer
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UnitedHealth 'huge winner' in health-care stalemate: Jim Cramer

For health insurers, the biggest fallout from the GOP's retreat from health reform will be the scheduled return of the Obamacare health insurance fee next year, after a one-year suspension.

UnitedHealth executives called it the chief drag on their results next year.

"The return of the insurance fee will be the single largest headwind in 2018," said Stephen Hemsley, UnitedHealth CEO, on the company's earnings conference call, though he added that the company has included the tax in its rate submissions for next year.

The tax affects all private health insurance plans, including exchange plans, employer coverage and Medicare Advantage plans. Insurers have argued that it has contributed to higher insurance rates under Obamacare.

"Despite the return of the tax and program funding pressures at large, we do intend to keep our benefit offerings as stable as possible," he said.

UnitedHealth's shares rose on the day, after the insurance giant reported better-than-expected second-quarter earnings, and medical cost controls were boosted by its exit from the Obamacare exchanges this year.

Shares of UnitedHealth's rivals — Aetna, Cigna, Anthem and Humana — all fell Tuesday. Analysts say investors had begun to price in the potential for an earnings boost in 2018 from the GOP repeal of the fee.

"The big (insurers) were generally insulated from coverage effects of repeal but would have benefited from health insurer fee repeal," said analyst Michael Newshel of Evercore ISI. "Humana, in particular, had earnings upside from the health insurance fee repeal … and so is underperforming today."

The insurers most highly tied to Obamacare's individual exchange market and Medicaid expansion bucked the trend and actually gained on the session. Centene rose 0.9 percent, while Molina Healthcare edged up 0.4 percent.

Ironically, the major Obamacare exchange insurers Centene, Anthem and Molina have been the biggest gainers among the health insurers year to date, as opposition to the House and Senate repeal bills has grown.

"For the last 3-4 months the story on health care has been very positive," said William Herkelrath, manager at TIM Group, a financial data and trade ideas network for investment banks and brokerages. "We haven't seen any ebbs and flows as political moments happen."

Herkelrath said investors have been consistently bullish on the near-term fundamentals for health care.

"All the comments are based on fundamentals — that near-term earnings are going to be strong," he said. "Whatever happens is going to take a long time to play out."

Among insurers, equity sales side traders have grown most bullish on Humana, in the wake of its merger with Aetna being dissolved, according to data from TIM Group.

Investors and insurers aren't the only ones watching the next steps from Washington on Obamacare taxes. Large employers had been hoping that the Senate would repeal the so-called Cadillac excise tax on high-cost insurance plans.

"It's going to make tax reform a trillion dollars tougher," without repealing Obamacare, said James Gelfand, the ERISA Industry Committee's vice president of health policy.

Large employers lobbied hard to maintain the current tax exemption for employer health benefits, but Gelfand thinks the fight may only get harder.

"It's creating a giant risk that members of Congress will create a new tax in employer-sponsored health insurance benefits," he said. "We are extremely vulnerable heading into tax reform."