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Investing in Health Insurance Stocks

Updated: May 25, 2021, 3:47 p.m.

Investing in businesses that offer products and services people must have can be a smart strategy. And, like it or not, health insurance ranks as one of the necessities for Americans today.

What are the top health insurance stocks to watch? And what do you need to know to get started investing in health insurance stocks? As the major health insurers might say: We’ve got you covered.

Top health insurance stocks for 2021

Here are three health insurance stocks and one exchange-traded fund (ETF) likely to perform well this year.

1. UnitedHealth Group

UnitedHealth Group (NYSE:UNH) ranks as the biggest health insurer in the world by far. Its UnitedHealthcare business unit offers health plans for employers and individuals and is also a major player in the markets for Medicare Advantage, Medicare supplemental plans, and Medicaid. The company’s Optum business segment provides information- and technology-enabled health services, including OptumRx pharmacy benefits management (PBM) services. While UnitedHealthcare generates more than three-fourths of the company’s total revenue, Optum is the bigger growth driver for UnitedHealth Group.

2. Anthem

Although Anthem (NYSE:ANTM) is less than one-fourth the size of UnitedHealth Group in terms of market capitalization, it’s still one of the largest health insurers. Anthem operates Blue Cross and/or Blue Shield plans in 14 states but is licensed to sell health insurance throughout the country. It competes in the same arenas as UnitedHealth Group, including by offering employer-sponsored and individual health plans, Medicare Advantage, Medicare supplements, and Medicaid. Anthem also operates a PBM, known as IngenioRx, that contributes a little less than 20% of the company’s total revenue.

3. CVS Health

You might think of CVS Health (NYSE:CVS) -- CVS -- as just a pharmacy retailer, but the company also runs CVS Caremark, one of the largest PBMs in the country. Thanks to its acquisition of Aetna in 2018, CVS Health is a top health insurer, too. The company’s healthcare benefits segment, which consists mainly of Aetna, generates more than one-quarter of CVS’s total revenue. While all three of these top health insurance companies pay dividends, CVS Health offers the most attractive dividend yield among the group.

4. iShares U.S. Healthcare Providers ETF

One way to scoop up shares of these top health insurance stocks -- plus others -- is to buy shares in an ETF. Although no ETF focuses solely on health insurers, the iShares U.S. Healthcare Providers ETF (NYSEMKT:IHF) comes close.

This ETF tracks the performance of the Dow Jones U.S. Select Healthcare Providers Index, which includes U.S. companies that provide health insurance, diagnostics, and specialized treatment. UnitedHealth Group, CVS Health, and Anthem are the three largest holdings of this fund, which also owns significant positions in other leading health insurers, including Centene (NYSE:CNC), Cigna (NYSE:CI), and Humana (NYSE:HUM).

What to look for in health insurance stocks

There are some things -- such as revenue and earnings growth -- that you should look at no matter what kind of stock you’re considering. There are, however, a few specific factors to evaluate when you’re considering health insurance stocks.

  • Revenue mix: Check to see where health insurers generate most of their revenue. Some, for example, could make more money from Medicare Advantage, while others are more heavily focused on Medicaid or commercial markets. Understanding a company’s revenue mix will give you a better idea of what its growth prospects and risks are.
  • Medical care ratio (MCR): This ratio (also sometimes referred to as the benefit expense ratio, medical cost ratio, medical loss ratio, or medical benefit ratio) measures medical costs as a percentage of premium revenue. The higher the MCR, the less profitable a health insurer will be.
  • Diversification outside of health insurance: It’s increasingly common for health insurers to diversify into other businesses (or other businesses to diversify into health insurance). Pay close attention to health insurers’ other areas of focus since they can significantly affect potential growth prospects and risks for these companies.

Risks for health insurance companies

Like all businesses, health insurers face risks, including being impacted by economic downturns and rising competition. However, health insurance companies also have a few unique risks, \including those related to:

  • Regulatory changes: The health insurance industry is highly regulated at the federal and state levels. The potential for major regulatory changes that cause challenges for health insurers is an ongoing risk. For example, should the U.S. implement a single-payer health plan in the future, health insurers would likely see many of their business opportunities vanish.
  • Reimbursement pressure: Even without major regulatory changes, health insurers continually face potential pressures related to reimbursement rates that can significantly alter their profits. Companies must secure approvals for insurance premiums from state regulators, who can be reluctant to pass on higher costs to their states’ residents. Medicare and Medicaid programs also set reimbursement rates that can hurt health insurers’ bottom lines.
  • Unforeseen medical costs: Health insurers set their monthly or annual rates based on expected medical costs, and there’s always the possibility that those medical costs could be much higher than anticipated. For example, the COVID-19 pandemic initially created considerable uncertainty for major health insurers and potentially could have caused medical costs to spike. Instead, though, the pandemic caused delays for non-emergency medical services, which resulted in health insurers’ medical costs during the pandemic to actually be lower than expected.
Health insurance document, stethoscope and bills

Source: Getty Images

Opportunities ahead for health insurers

Even with the risks health insurers face, major opportunities lie ahead. As baby boomers age, demand for Medicare Advantage and Medicare supplemental plans is increasing.

President Biden has already signed executive orders to extend enrollment for health plans established by the Affordable Care Act (ACA) and have federal agencies promote easier access to these plans and to Medicaid. Biden also wants to expand Medicare to allow anyone to purchase similar health insurance, and he is seeking to increase federal subsidies for ACA plan premiums.

With the federal administration committed to achieving significant healthcare reforms, the stocks of health insurers, especially those focused on Medicare and Medicaid, are likely to perform well during the next few years.

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