Inflation may be rearing its ugly head, but companies can still make money in this environment. They just need pricing power -- the ability to pass their rising costs along to their customers. If customers are willing to pay more for the same product, companies don't have to give up their gross profits.
Health insurers have been hit particularly hard, as medical costs have risen considerably faster than insurers were expecting. One way to tease out whether customers are unwilling -- or more likely unable -- to pay the higher prices is by looking at the changes in memberships.
Headed in the wrong direction?
The big black hole
And then there's WellCare Health Plans
Only half the story
Of course, membership isn't the whole story. To make growing membership numbers meaningful to the bottom line, the companies must raise rates in tandem with the increase in medical costs.
We'll get a better idea of whether that's happening as companies release their third- and fourth-quarter revenue. The number for investors to keep an eye on is the medical care ratio -- the fraction of premiums paid out for care. Think of it as the gross margin of the health-care industry.
There is some evidence that insurers are following through with their pledge to not lower margins just to keep customers around. Last week, Humana said that it's raising the prices of its stand-alone Medicare Part D drug program. The price is above the Centers for Medicare and Medicaid Services benchmark for assigning dual eligible Medicare/Medicaid patients, so Humana won't be getting the 308,000 auto-assigned members that it had this year. Investors were rightly more excited about the potential higher revenue than the loss of members, sending the stock up 4% after the announcement.
Priced for very little growth
Many of the health insurers are priced well below their historical price-to-earnings ratios. Short-sighted investors have essentially priced zero growth into the industry. Sure, it'll take a while to get all the higher medical costs built back into the premiums, but eventually the growth will return.
Investors looking to add some value stocks to their portfolio could be seeing one of the best opportunities in many years.
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