Obamacare Premiums: Lower Than Expected or Upcoming Sticker Shock?

It's crunch time! In just five short days the state-run health exchanges as mandated under the Patient Protection and Affordable Care Act are set to open for business, allowing consumers to transparently and openly search for health insurance within their state.

There are plenty of unanswered questions as we lead up to this Tuesday's launch, least of which being whether most government branches will be open to see it happen! Still to be answered is whether the technical aspects of the exchange are ready to be tested on a broad scale and if PPACA-trained state employees are ready to take on the job of assisting consumers when they need help choosing an insurer or navigating the exchanges.

Source: White House on Flickr.

A long-awaited question answered
One question, though, that seems to finally be answered is how much the average health plan is going to cost the U.S. consumer. With all but three federally run state exchanges reporting their premium rates, the mid-tier silver plan (which is expected to be the best-seller among the tiers) under the PPACA, known also as Obamacare, averages out to $328 per month, according to data collected by the Department for Health and Human Services.

Of course there were wide swings within the data, which varied based on geographic zone, whether access to health care was easy to get, and the number of insurers competing within the state. If you recall, I've often commented that more competition between insurance companies will breed lower rates, and, not surprisingly, states with just two or three insurers holding a dominant portion of the market share tended to have the highest mid-tier premium rates.

If you live in either Minnesota or Tennessee, you're probably dancing the jig because according to the HHS these two states have the lowest mid-tier premiums of $192 and $245 per month, respectively. On the other end of the spectrum, residents in low population rural states like Alaska and Wyoming are going to be hunting for game to sell just to pay for their $474 to $516 per month mid-tier plan !

Obamacare: Cheaper than expected or sticker shock extraordinaire?
So now that we fully have the figures, did Obamacare live up to its promise of providing lower-than-expected rates or was this all just a bunch of fluff? The answer really depends on how old you are...

If you're north of 50 years old, Obamacare is likely going to be a blessing for you. The addition of younger participants into the health care pool will help spread insurer risk around and help keep premiums down. Moreover, Obamacare subsidies for those who make less than 400% of the national poverty level, which is about $46,000 for an individual or $92,000 for a family, will help rein in some of the presumed $328 per month cost -- and no age group is anticipated to receive a larger subsidy than the 50-and-up crowd. With more encompassing benefits and the expectation of hefty subsidy-lowered premiums, I'd say the 50-64 crowd has a lot to look forward to.

Then again, if you're in my age bracket, 26 through 35 years old, prepare to open up your wallet and feed the health reform machine! In many states, prior to the approval of Obamacare people under the age of 30 or 35 were able to buy a catastrophic insurance plan. Many of these plans retailed for $120 or less per month and covered about 50%-60% of medical/hospitalization costs should you need to see a doctor. Really, as the name would suggest, they were in place to cover serious illnesses or injuries. Under Obamacare, most catastrophic health plans have disappeared in their entirety and, even if they still remain, they've been forcibly beefed up just to meet the minimum benefit requirements as outlined in the PPACA. This means that young adults which had previously been able get away with around $100 per month for their catastrophic plan will now need to pay around $200 per month for something similar. This extra $800 to $1,500 annually is a lot of money coming out of the pockets of the younger generation and could represent risks to a lot of sectors in the economy.

What does this mean for your investments?
Contrary to popular belief, I feel one of the biggest winners will be Medicare Advantage providers. Humana (HUM -2.27%), Universal American, and UnitedHealth Group (UNH 1.23%) generate about two-thirds, three-quarters, and one-quarter of their revenue, respectively, from selling these supplemental insurance plans to the elderly to bridge the gap of what's not covered by Medicare. With seniors expected to see potentially lower premiums than they were previously paying -- as long as a decent number of younger adults sign up for health insurance -- this extra cash may be used to purchase Medicare Advantage supplement insurance plans that would, in turn, help all three aforementioned companies.

For insurers, the jury is still out. The obvious beneficiaries are those insurers like WellPoint (ELV 0.61%) and CIGNA that ponied up billions to purchase a rival in order to get their share of the Medicaid expansion participants. Under the PPACA, some 16 million newly eligible participants will be able to sign up for health insurance over the coming years who had previously not qualified for insurance. Although margins on government-sponsored patients aren't too encouraging, the massive growth in members and volume will more than make up for weak margins.

On the other hand, adverse selection will likely hurt individual market players at the get-go because logic would have it that those who are sick and most in need of health insurance (and thus the most unwanted customer for a health-benefits provider) are the one's that'll be rushing to sign up first. Insurers may wind up facing a bit of "buy the rumor, sell the news" in the coming months.

Hospitals like HCA Holdings (HCA -1.50%), the nation's largest hospital operator, are also a toss-up. Originally it looked as if hospitals couldn't lose under Obamacare, but some of the apparent risks are now more visible than they were six months ago. For one, the penalty for not getting health insurance is extremely low in 2014 (1% of your annual income or $95, whichever is greater), which may cause many to just opt for the penalty, especially given that the IRS won't garnish your wages or seek your personal property should you owe that penalty to the government. The worst they'll do is withhold some or all of your tax refund (should you be due one) up to the amount that you owe the government vis-a-vis the individual mandate penalty.

If that's the case, hospitals' doubtful account provision -- the amount they write-off each year for services rendered that go uncollected (often to the uninsured) -- is unlikely to fall significantly for at least another two years. Ultimately, though, hospitals should benefit from lower doubtful account provisions, but it looks like it'll take a lot longer than expected to realize that boost in EPS.

You'd also be smart to not forget about special situations investments like Xerox (XRX) that are going to benefit from Obamacare almost regardless of whether or not the aforementioned companies are successful. Xerox is a go-to name when it comes to processing Medicaid claims since it's the exclusive processor in the state of California where eligible Medicaid participants are expected to expand by 1.4 million people in the coming years. Xerox also is a collection point for states receiving electronic health record subsidies from the government. Dipping in both ends of the pool, Xerox is poised to rake in gigantic rewards.

We still have more questions left to answer, but at least now we're starting to be able to put the pieces of the puzzle together. Hopefully a few weeks from now when insurers and/or the U.S. government divvies out its initial data we should have a better idea of where these aforementioned sectors stand.