The health care industry has been in the news a lot lately. Today marked the official day when Obamacare insurance exchanges opened, and the volume of news had been mounting steadily up to this date. The ramped-up inflow of new information created volatility in the industry, sending some stocks in the industry soaring higher and some plummeting lower.
Thus, how are investors like you and me to make sense out of all this madness, and what does all this recent activity mean for our money?
News sends some soaring, others plummeting
On Wednesday, Aon (NYSE: AON ) announced that it signed up 18 companies to participate in its Aon Hewitt Corporate Health Exchange. These 18 companies included Walgreen, the country's largest drug store operator. Aon and other benefit consulting firms, including Tower Watson (NYSE: TW ) and Marsh & McLennan (NYSE: MMC ) all rose to multi-year highs on this news.
On the same day, pharmacy benefit managers, such as Catamaran (NASDAQ: CTRX ) and Express Scripts (NASDAQ: ESRX ) suffered major declines on the back of fears regarding the growing importance of these private exchanges.
Shifting to private health care exchanges
The news of Aon's deal came days before the Affordable Care Act, commonly known as Obamacare, began to take effect. Roughly 7 million people are expected to buy insurance on these private exchanges for 2014, and 2014 will be the first year in which a substantial number of large employers will utilize private exchanges for their workers' benefits. Companies, which began the unveiling of plans in September, are planning to send at the very least 1 million employees to private exchanges in 2014.
Additional growth is expected in 2015, with nearly one in three major companies considering a move. Projections by analysts at William Blair forecast 6.5 million employees being on these exchanges by 2015. And with 170 Americans having received employer-based health insurance in 2012, the room left for possible expansion is broad.
Thus, Aon, Towers Watson, and Marsh & McLennan, which already dominate the consulting market for the top 1,000 U.S. companies, are set to benefit as they can utilize their leading market position to promote their private exchanges.
Not all will benefit from this trend
Yet, not all companies in the industry are cheering this trend. Pharmacy benefit managers such as Catamaran and Express Scripts, which have maintained a more direct relationship with the employers in the past, could lose out to the private exchanges.
What exactly are pharmacy benefit managers, or PBMs? These companies process prescriptions for the groups that pay for drugs -- most commonly insurance companies and corporations -- and use their size as leverage with drug makers and pharmacies.
Therefore, this substantial shift to private exchanges could result in a less direct relationship with employers, opposed to forcing the pharmacy companies to contract with health insurers, according to Cowen & Company analyst Charles Rhyee.
What this all means for your money
For benefit consulting firms, this shift is extremely beneficial and should fuel growth for these companies as the private exchange model further gains traction as it matures. EPS for Aon is projected to grow from $2.99 in 2012 to $5.22 by 2015, partially on the back of the expected growth of its private exchange. A similar caliber of growth in the EPS metric is expected for Tower Watson and Marsh & McLennan, with 17% and 26% growth expected over the same two-year period, respectively.
The apparent losers in this ordeal, Catamaran and Express Scripts, are expected to feel negative effects from the growing importance of private exchanges, however just how much pain these companies will feel is in question. Brian Tanquilut, a Jeffries analyst, stated in a Sep. 10 note that concerns regarding the impact of this trend involving large employers are overblown. Analysts covering both companies see Catamaran's and Express Scripts' strong market positions as partially enough for these companies to offset the loss of customers. Positive EPS growth for Catamaran and Express Scripts is still expected by analysts for the next couple of years.
The Foolish bottom line
Aon's groundbreaking deal with Walgreen's is only a confirmation of the emergence of private health insurance exchanges as a major force in the health care industry. While Aon, Tower Watson, and Marsh & McLennan are set to capitalize on the growth in this industry, Express Scripts and Catamaran could potentially be hurt by these alterations. Yet most analysts believe that these changes could take years to take effect.
Over the long term, this shift in the health care industry is likely to have major effects on the industry. However, in the short term, investors may be overreacting, both on the upside and downside.
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