We're in the final quarter of 2015, and that means it's time to start looking forward to what headwinds and tailwinds will affect stocks most in 2016. Last Thursday, UnitedHealth Group (NYSE:UNH) reported earnings and helpfully gave us a nice preview of the big things to keep an eye out for in health insurance as we approach 2016.
Obamacare, of course
Obamacare, the ever-controversial healthcare law, of course played a major role in UNH's call, with the health insurer announcing plans to expand its exchange footprint from 24 states in 2015 to 35 in 2016 -- a startling shift for a company that originally took a "wait and see" approach when the exchanges kicked off in 2013. Management is bullish on the company's opportunity in the exchanges long term, with President David Wichmann noting, "we continue to expect exchanges to develop and mature over time into a strong, viable growth market for us" (this and other quotes courtesy of S&P Capital IQ).
Going forward, it'll be interesting to see what happens to competitors as UnitedHealth Group increasingly muscles in on the exchanges. On a macro level, of course, note on your calendars to watch from November 1 to January 30 to see if Obamacare achieves its goal of 14 million sign-ups through the exchanges (of which the administration expects about 10 million to stick through the end of 2016). And we'll all want to keep an eye out to see if the health insurers are able to turn a profit on these health plans.
Pay for results
The American fee-for-service system is shifting to paying for actual health outcomes (usually known as value-based care). The idea here is that, instead of paying medical providers like hospitals for every test and procedure, you pay based on whether the patient gets better or not. These contracts take a number of different forms (risk-sharing, bonuses based on care improvement, etc.), but it's clear that the shift is being seen across the entire industry. UnitedHealthcare (the insurance part of UNH) intends to "deliver $65 billion or more in care annually by 2018 through value-based care contracts," according to Wichmann.
And why wouldn't they? Insurers charge premiums in return for taking on risk (people get sick from time to time). If they can pass some of that risk on to hospitals by paying them extra when people get better quicker and penalizing them when they don't, then they can more easily control their costs. This system has the potential to be popular from a consumer perspective too -- if someone decides your doctor could have done something differently, wouldn't you want them to have their pay docked?
UnitedHealth Group is uniquely well-positioned to benefit from this shift. While UnitedHealthcare works to pass risk on to providers, the company's Optum unit (which, among other things, offers consulting services on population health management) can sell its services to hospitals looking to better treat their patients and unlock additional money from whatever value-based contract they've signed (including those from potential competitor insurers). Talk about having your cake and eating it, too.
More gold stars
The Centers for Medicare and Medicaid Services issues Star ratings for Medicare Part D (drug) and Medicare Advantage (private Medicare) programs each year. The ratings (2-5 stars) are dependent on a number of factors, including measures of customer service, access issues, and health outcomes. Medicare Advantage plans rated four stars or higher are eligible for bonus payments in some cases, and a McKinsey Study estimates that plans rated below four stars will lose $3.47 billion in bonuses this year that they might otherwise have earned. Higher-rated plans also tend to attract more customers -- not exactly shocking since most people probably want to be in a higher-quality plan where possible.
That's why it's not surprising that UnitedHealth management announced that it's investing heavily to improve its Medicare star ratings, with a goal of having 80% or more of its members in at least a four-star plan by payment year 2018. And UnitedHealth Group isn't the only health insurer fighting hard for market share in a growing Medicare Advantage population. One of the major reasons Aetna (NYSE:AET) is buying up Humana is for its "industry-leading Net Promoter Score and Medicare Advantage star ratings," to quote Aetna CEO Mark Bertolini on the company's Q2 earnings call. Aetna and UnitedHealth both see the tremendous growth opportunity with a growing elder population (the so-called graying of America) and are working to capitalize on it. Keep an eye out for Medicare Star ratings next year to see whose plan is actually working.
Talk is cheap
Insurance execs can talk about what they're doing until they're blue in the face -- but results are the only thing that matters. Fortunately, an insurer's ability to roll with each of these trends can be measured by cold, hard numbers: exchange enrollment, percentage of contracts that are value-based, and change in Medicare Star ratings. Keep an eye on those numbers, as they'll help you identify the winners and losers as healthcare in America continues its quiet revolution.
Michael Douglass 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.