Around $3 trillion is spent each year on healthcare in the United States. And about $0.20 of each of those dollars comes from one source: Medicare. That amounted to nearly $587 billion in 2013. The Congressional Budget Office expects net Medicare outlays to increase by 67% by 2024 due to a growing population age 65 and over and higher healthcare costs.
Where there's a lot of money flowing, there are also usually great investment opportunities. Here are three of the best stocks to invest in the Medicare boom.
1. Humana (NYSE:HUM)
Probably no other company has its fortunes tied as closely to Medicare than Humana. The Kentucky-based health insurer ranks as one of the biggest players in the Medicare market with at least one plan offered in all 50 U.S. states. It has participated in the Medicare program for over three decades. But that's not what sets Humana apart from other major health insurers.
Over 46% of Humana's nearly 14 million members stem from either individual Medicare Advantage plans or individual Medicare stand-alone prescription drug plans. Add to that figure almost half a million other members enrolled in the insurer's employer group Medicare-related plans. 61% of Humana's Retail segment premiums and 11.4% of Employer Group segment premiums derive from Medicare plans.
Humana's stock has soared nearly 70% over the past 12 months and is up 23% so far in 2015. The company's dividend is relatively weak, with a yield of only 0.60%. But the stock's performance has made dividend payments a non-issue. Growth in Medicare should continue to keep Humana humming into the future.
2. UnitedHealth Group (NYSE:UNH)
While it claims the No. 1 spot among health insurers in terms of market cap, UnitedHealth isn't quite as dependent on Medicare revenue as Humana. However, the big insurer has a large presence in the federal program.
UnitedHealth claims over 3 million Medicare Advantage members and 3.75 million Medicare supplement members. Combined, this accounts for 15% of the company's total medical membership. And that doesn't include UnitedHealth's more than 5 million Medicare Part D prescription drug plan enrollment.
The company's OptumRx business unit handles those Part D prescriptions. OptumRx has been the biggest driver of revenue and earnings growth recently, with revenue in 2014 up 33% compared to the prior year and earnings up 67% year-over-year.
Shareholders have enjoyed gains of 56% over the past 12 months. UnitedHealth's stock is up 17% year-to-date. Investors also benefited from a 1.2% dividend over the last year and a five-year average yield of 1.4%.
3. Aetna (NYSE:AET)
Aetna offers individual Medicare plans in 41 states. The health insurer also sells Medicare supplement plans in 48 states and Medicare Part D prescription drug plans in all 50 states.
In terms of Medicare membership, Aetna trails both Humana and UnitedHealth. However, the insurer counts 1.14 million Medicare Advantage members and 462,000 Medicare supplement members. Aetna also has over 2.3 million Medicare prescription drug program members. With total medical enrollment of nearly 9.3 million and total pharmacy enrollment of over 15.3 million, Medicare clearly makes a significant contribution to Aetna's financial performance.
That role is becoming even more important -- at least on the medical side. Aetna's Medicare medical membership grew more than 18% from 2013 to 2014. However, Medicare prescription drug membership dropped 15% during the same period.
Aetna's stock performance has tracked pretty closely to that of UnitedHealth's. Over the last 12 months, shares are up 59%. So far in 2015, Aetna's stock has gained 21%. The dividend yield of 0.9% added a little more to investors' returns.
Risk and reward
Humana, UnitedHealth Group, and Aetna all face one common risk. Future regulatory changes could make the financial dynamics of competing in the Medicare market less attractive. On the other hand, it is also possible that the federal government could make changes that boost private insurers' prospects.
One thing is certain. Medicare enrollment is on track to continue expanding with the current demographic trends in the U.S. Odds are that all three of these companies will profit from this growth. So, investors looking to benefit from the Medicare boom should be able to do so with any of these three stocks.
Keith Speights has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group. 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.