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.


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, the federal health-insurance marketplace, went live in October.


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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers