Are Obamacare Co-Ops Disrupting Insurers?

Health-care co-ops signed up hundreds of thousands of new members during Obamacare's first open enrollment, but that may not be cause for worry by Aetna and WellPoint investors.

Jun 29, 2014 at 12:01PM

Recent funding for health-care co-ops designed to boost insurance competition hearkens back to post-Great Depression regulations that led to creation of hundreds of small health-care co-ops throughout the farm belt.

Although only a few of those New Deal co-ops have flourished and grown into dominant players, nearly two dozen new co-ops launched last year thanks to $2 billion in federal loans and grants.

Those new co-ops hope to serve as important health-care insurance alternatives to plans offered under the Affordable Care Act by large for-profit insurers including Aetna (NYSE:AET) and WellPoint (NYSE:ANTM). However, results for co-ops in the first open enrollment period were mixed.

In New York, Health Republic Insurance expected to sign up just 18,000 members, but ended up registering more than 112,000. Conversely, Health Alliance Mutual Insurance had hoped to sign up 25,000 people in Tennessee, but only ended up winning 325 members.

Those early hit-or-miss results suggest the jury is still out on whether co-ops can thrive on the marketplaces. If they can, they could win away valuable members from some of the industry's biggest players.

G

Source: Aetna.

A bit of background
Providing a public option that would compete against private insurers like Aetna and WellPoint proved too risky for lawmakers, who compromised by providing funding to new member-owned and managed co-ops that could increase competition in smaller markets and help reduce premiums.

That compromise included access to loans and grants totaling $2 billion that co-ops could use to build their network and satisfy state regulatory solvency requirements. In total, 23 co-ops opened for business when Healthcare.gov, the federal health-insurance marketplace, went live in October.

G

Source: Minuteman Health.

A new way of thinking
Health-care co-ops operate differently than private insurers.

Co-ops are, by definition, not-for-profit. That means that all money above and beyond expenses must either be returned to members or used to improve members' health (including reinvestment in the business).

That's a stark contrast to the for-profit insurance industry that serves the vast majority of Americans.

Profit margin has always been scarce for insurers. Their operating margin is typically just in the mid-single digits.

AET Operating Margin (TTM) Chart

AET Operating Margin (TTM) data by YCharts.

Yet despite their thin margins, those companies use their scale to deliver billions of dollars in annual profit. Aetna, for example, provides insurance to over 20 million people and collected $14 billion in premiums in the first quarter. WellPoint, which serves nearly 37 million members, posted first-quarter revenue north of $17 billion.

The ability to leverage those billions in revenue across massive networks allowed both companies to generate significant earnings for shareholders. Aetna's first-quarter net income was $665 million, while WellPoint collected $885 million.

AET Net Income (TTM) Chart

AET Net Income (TTM) data by YCharts.

The profit produced by the for-profit insurers suggests there could be significant opportunity for co-ops to offer lower premiums. Despite having limited actuarial experience, co-op prices turned out to be very competitive this year.

According to McKinsey research, co-op insurance plans represented 37% of the lowest-priced plans offered in states in which they participated.

Fool-worthy final thoughts
On their own, co-ops won't necessarily solve the problem of skyrocketing health-care costs, but they could serve as part of a broader solution to slowing how quickly those expenses climb.

Although 2014 prices were very competitive, we don't know if those prices were sufficient to cover the cost of member care. If not, co-ops may be forced to increase premiums for 2015 to remain solvent.

If co-ops achieve enough scale to survive, they'll win away members who would otherwise end up on plans offered by insurers such as Aetna and WellPoint. While that would reduce revenue growth for those insurers, there appears to be plenty of marketplace members to go around. For example, in the first open enrollment period, WellPoint signed up more than 600,000 new members. That was handily higher than the 450,000 members that co-ops enrolled nationwide.

Obamacare is already old news
We already know a lot about Obamacare -- and the companies poised to profit have already seen their shares run up. The best investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns you will need The Motley Fool’s new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool recommends WellPoint. The Motley Fool owns shares of WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers