First-quarter financials for UnitedHealth Group (NYSE:UNH), Anthem (NYSE:ANTM), and Centene (NYSE:CNC) show that sales and profit are climbing in spite of Obamacare headwinds. Can insurers continue their winning ways if Donald Trump repeals and replaces the Affordable Care Act?
In this clip from the Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes and contributor Todd Campbell discuss how these top insurers are racking up growth and what could be next for the industry.
A full transcript follows the video.
This video was recorded on April 26, 2017.
Kristine Harjes: Let's pivot now to the insurer side. Todd, this was your idea, you wanted to talk about post-100 days of Trump, we're coming up on it, it's in less than a week at this point. How are the major health insurers doing?
Todd Campbell: We're on Trump-100-day-watch, and we want to know what the impact is on insurers. We came into 2017 expecting that there would be a repeal-and-replacement deal put forth in Washington. I was a little surprised that it happened as quickly as it did. But sure enough, things are hard to do when you're talking about winning support from so many different people in both the House and, potentially, later on, in the Senate. As a result, that derailed Trump's first foray to try and repeal and replace. That was called the American Health Care Act, which you and I, Kristine, discussed at some length in a show a couple of months back, if anybody wants to go back and listen to that. Obviously, as part of Trump's policy agenda, health insurance was going to be a huge part of that. So I thought it might be helpful to go back and say we're one quarter in, Q1 in the books -- how did health insurers do? Was there any evidence that Trump's election was a good or bad thing? Or is it just business as usual?
Harjes: Right. Let's start, first off, with UnitedHealthcare, who we've already mentioned a little bit on this show today, that they are an enormous health insurer in the United States. They're kind of an interesting case because they basically opted out of Obamacare by saying, "We're not making any money here, so we'd rather not; no, thanks." That put them in kind of an interesting position looking at healthcare reform, because you would think that because of their lack of exposure to Obamacare it wouldn't really affect them much whether Obamacare was repealed and replaced or not. How did that end up panning out?
Campbell: It's all upside for UnitedHealth; think about it that way. They were losing money on the Obamacare plans, so they stopped selling them. That brings some back to flat. Now, if a replacement plan gets put in and, theoretically, it becomes more favorable to insurers -- which, I think, broadly speaking, people were anticipating that it would be more profitable for insurers, because you need to have insurers play ball in order to have any kind of a system succeed. So I think there was a potential for a lot of upside. But it's really just business as usual for UnitedHealthcare in Q1. This is, like you mentioned, a Goliath. They're expected to do $200 billion in revenue this year. If you look at their Q1 numbers, premiums alone were up 12% to $39 billion. They made 12% more on premiums year over year in the quarter. Of course, that translated into earnings growth, too. You had non-GAAP EPS that was reported in the quarter of $2.37. That was up 31%. So you have earnings growing much more quickly than revenue, and both of them growing solidly in the double digits.
Harjes: Right. As you mentioned, UnitedHealth is extremely diversified; they are huge. Let's look at the other side of the spectrum there, at a more niche player like Centene, who is mostly a Medicaid player.
Campbell: Centene is an interesting story, too. If the replacement plan had been put into place, then you'd be wondering, what's going to happen with Medicaid expansion states? Centene gets the majority of its business from running Medicaid programs for different states. Part of the replacement plan was to cap enrollment in Medicaid expansion states in 2020, and block-grant money to states from there on, which would create a significant amount of uncertainty for their business. Again, since this is on hold, it's business as usual for the company. They reported strong revenue growth, but again, that's a little messy, because they did an acquisition last year. So it's probably better to look at their EPS growth. In the quarter, their earnings growth was up 51%; they reported $1.12 in non-GAAP EPS. So this is a company, obviously, that's making some money. It's important to recognize that not only are they interesting, at a minimum, to recognize that UnitedHealthcare has said, "We don't want to have any part of Obamacare," Centene has said, "We think it's a good business to be in. In fact, we're looking to expand our participation in it in 2018, assuming that everything continues as is." They handle about 1.1 million Obamacare enrollees, and that's up from around 680,000 last year.
Harjes: Two completely different approaches. Let's touch on one more. I'm picking them because we were just talking about them in the PBM section. How about Anthem?
Campbell: Anthem just reported this morning. Unfortunately, I wasn't able to listen to the conference call yet. It's on my agenda for later on. But I did go through and tear through the press release. Again, like UnitedHealthcare -- UnitedHealthcare is the biggest, Anthem is the second biggest -- everything seems to be going well. Anthem still participates in Obamacare; they offer plans in a dozen or so states. They reported total revenue was up 11% to $22.5 billion. Strong, double-digit year-over-year growth again. Their non-GAAP EPS in the quarter was $4.68, which was up 35% year over year. So regardless of all of the other chatter that we hear about Obamacare, not Obamacare, whatever, you look at UnitedHealthcare's results and Anthem's results, and from a growth perspective on a top and bottom line, they're kind of comparable. It doesn't seem like not participating or participating is really that big of a needle mover, in terms of how much these companies are growing year over year.
Harjes: Yeah, that's interesting. One other point that stood out to me when I was looking at this, I was looking earlier today at different lobbying budget across healthcare. America's Health Insurance Plans, a lobbying company, decreased their budget going from 2016 to 2017, which really stood out in contrast to what some other healthcare lobbyists were doing. That was a 25% decline in their budget. Of the top 25 spenders in that area, they were one of just four to cut their budgets. This is a group represents Anthem, Cigna, Centene, Humana. I don't know, I just think it's a really interesting dynamic, to see what's going on in Washington, how are the different lobbyists reacting to it, how are the different insurers reacting to it, and how are the stock prices reacting to it? This is absolutely still something that remains in limbo, but it's still fun to tease of the effects of the chatter.
Campbell: Yeah. Of all of these companies we discussed today, if you want to go back and read one earnings transcript for interest, go read Centene's, because they really put this front and center and talked a lot about Obamacare, and how tough it might be, or, the challenges that might be, to unwind it and get a replacement plan across the finish line. This is not going to be easy. The AHCA, they didn't vote on it yet, there's a lot of chatter that it may be brought back out in front of legislators to vote on. Who knows how that middle ground will be found in the House, and then it's going to go to the Senate, and middle ground has to be found there. I don't know. I think the point that Centene's management was trying to make is, we're ready to adapt to whatever the market throws at us. As it stands today, we're OK and we're doing fine. If it changes, we'll adapt to it. I think that's a big takeaway for investors. Never underestimate insurance companies' ability to adapt to a changing marketplace.