Anthem (NYSE:ANTM) had a banner 2015, with the announcement of its planned $54 billion acquisition of fellow insurance company Cigna (NYSE:CI) dominating headlines as a wave of consolidation swept through the health-insurance industry. And in a year when the stock market was essentially flat, Anthem's 11% share price gain was nothing to sneeze at, either.
With the tailwinds of Medicaid expansion and the Obamacare exchanges, the past few years have been good growth opportunities for Anthem. But will 2016 put them all to shame?
2016 holds some serious opportunity
The biggest opportunity for Anthem in 2016 is the Cigna acquisition. Cigna's massive book of commercial business and strong exposure to big Medicare markets could set up Anthem for excellent business growth over the next several years as it aims to beef up its Medicare Advantage market share. Together, Cigna and Anthem would have a massive platform primed to grow in any of a number of different directions, depending on where the best opportunities lie. And if the deal doesn't go through successfully, Cigna and Anthem look like subscale players in an industry that is rapidly consolidating (Aetna (NYSE:AET) and Humana are also seeking to combine).
Assuming the acquisition goes well, Anthem has some other nice tailwinds that it's expecting in 2016. Most notably, the Medicaid business has been growing at a steady clip thanks in part to the Affordable Care Act's Medicaid Expansion. But it's more than just the market itself growing -- Anthem's done a good job of seizing more and more of the pie, most notably with its recent incursion into managed Medicaid for Iowa. And with an estimated $68 billion in new Medicaid business expected to come to market by 2020, and Anthem well positioned to pick up a sizable portion, the future is definitely looking bright.
Anthem's also expecting difficulties
The public exchanges, which have long been a bright spot in Anthem's growth plans, have soured for the company recently. Part of it is the scale-down of expected overall enrollment in the Obamacare exchanges, since the CMS revised the previous CBO estimates for late 2015 enrollment down from 15 million to between 9 million and 9.9 million. Part of it is also what Anthem's management has deemed irrational and unsustainable pricing by competitors -- or, put another way, other folks are underbidding them on the public exchanges. And the competitor price points aren't moving in Anthem's direction as quickly as management expected. As such, CFO Wayne DeVeydt noted on the Q3 call that, in the individual market, "we will not be growing market share and technically market share for us will deteriorate next year." (This and other quotes come from S&P Capital IQ.)
And while Anthem has made huge strides to improve its Medicare business, 2016 looks likely to be more of a "retooling" year than a growth year. Membership is expected to remain essentially flat as Anthem finishes a multiyear repositioning, although management anticipates some improvement in margins in 2016 before pushing into the big membership ramp-up that I discussed. Anthem also has a real challenge ahead of it in improving its Medicare Advantage quality ratings. Anthem expects that over 25% of its Medicare Advantage membership in 2016 will be in plans rated four stars (out of five) or higher. For Aetna that number is 87%.
There's just really no comparison between them, as Aetna has consistently pushed into Medicare Advantage and has made the upfront capital expenditures necessary to get its plans to the top of the rankings. Add to that Aetna's Humana acquisition, which is largely driven by Humana's big Medicare Advantage footprint, and it's hard to see how Anthem can easily catch up. Now, Medicare Advantage is a big enough (and, for that matter, growing) pie that there can be multiple winners... but Aetna looks likely to preserve and extend its dominance in the near term, and certainly through 2016.
So, circling around to that original question...
I believe that 2016 will be Anthem's best year yet -- but not its best year ever. Assuming the Cigna deal closes in 2016 and that management continues pushing its efficiency and quality targets, 2016 will be an excellent building year -- the sort of year that sets up 2017 and 2018 to be truly impressive. And investors with a long-term mind-set should take note in case any failure to deliver on a specific quarterly target leads to a buying opportunity.
Michael Douglass has no position in any stocks mentioned. The Motley Fool recommends Anthem. 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.