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Investing in Health Insurance Stocks

By Keith Speights – Updated Jun 10, 2022 at 3:05PM

Investing in companies that offer essential products and services can be a smart wealth-building strategy. Like it or not, health insurance ranks as one of the most important necessities for Americans today.

What are the top health insurance stocks to watch? And, what do you need to know before investing in them? As the major health insurers might say, “We’ve got you covered.”

Health insurance document, stethoscope, and bills.
Source: Getty Images

Top health insurance stocks for 2022

Here are four publicly traded health insurance companies 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.

Optum could soon grow even larger. It plans to acquire home health provider LHC Group (NASDAQ:LHCG) for $5.4 billion this year. Optum already owns primary care and ambulatory surgery center facilities. The move into home health is a natural next step. However, the deal must first be approved by regulators.

2. Anthem

Although Anthem (NYSE:ANTM) is only a fraction of 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, with offerings that include employer-sponsored and individual health plans, Medicare Advantage, Medicare supplements, and Medicaid. Anthem also operates the IngenioRx PBM, which contributes a little less than 20% to the company’s total revenue.

Anthem is in the process of changing its name to Elevance Health. The rebranding is part of Anthem’s transition from focusing primarily on health insurance to addressing a broader spectrum of healthcare needs.

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 2018 acquisition of Aetna, 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. However, CVS Health’s retail and long-term care pharmacy business has been a bigger driver of revenue growth recently.

Although all these top health insurance companies pay dividends, CVS Health offers the most attractive dividend yield in the group.

4. Centene

Centene (NYSE:CNC) focuses largely on the Medicaid market. Traditional participants (including those in the Children’s Health Insurance Program and Temporary Assistance for Needy Families program) and participants who need frequent monitoring make up more than half of the company’s total membership base. Centene’s Medicaid plans generate a little less than two-thirds of the company’s total revenue.

Medicaid remains a fast-growing business for Centene. However, its Medicare revenue is increasing at an even faster rate. The company’s commercial health plans are also contributing to Centene’s overall revenue growth.

Centene is expanding via acquisitions. It closed on the purchase of Magellan Health in January 2022, a deal that gives Centene a presence in the behavioral healthcare market.

5. 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.

The 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, Cigna (NYSE:CI), and Humana (NYSE:HUM).

There are two primary downsides to buying the iShares U.S. Healthcare Providers ETF compared to investing directly in the top health insurance stocks. First, if your goal is to invest only in health insurance, the ETF isn’t a good fit because of its other holdings. Second, you’ll have to pay annual expense fees. The iShares U.S. Healthcare Providers ETF’s expense ratio is currently 0.42%.

What to look for in health insurance stocks

There are some metrics -- such as revenue and earnings growth -- that you should evaluate no matter what kind of stock you’re buying. There are also a few specific factors to consider when you’re choosing health insurance companies on the stock market:

  • Revenue mix: Understanding a company’s revenue mix -- how it generates most of its revenue -- can give you a better idea of its growth prospects and weaknesses. Some health insurers generate most of their revenue from Medicare Advantage, while others are more heavily focused on Medicaid or commercial markets.
  • Medical care ratio (MCR): Also sometimes referred to as the benefit expense ratio, medical cost ratio, medical loss ratio, or medical benefit ratio, this metric measures medical costs as a percentage of premium revenue. The higher the MCR, the less profitable the health insurer.
  • Diversification beyond health insurance: It’s increasingly common for health insurers to diversify into other businesses (and for other businesses to diversify into health insurance). That’s been the case with several of the companies on our list, especially UnitedHealth Group and CVS Health. Pay close attention to health insurers’ other areas of focus since they can significantly affect a company's growth prospects and associated risks.

Risks for health insurance companies

Like all businesses, healthcare companies face risks, including being affected 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, if the U.S. implemented a single-payer health plan in the future, health insurers would likely see many of their business opportunities vanish. It’s also possible that future presidential administrations could curtail federal funding for Medicare and Medicaid.
  • 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 medical costs could be much higher than anticipated. So far, the pandemic hasn’t caused significantly higher medical costs. However, some major health insurers have noted modest increases in costs due to COVID-19. They also acknowledge that uncertainties exist about potential pandemic medical costs.

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. (So far, the two goals haven’t been achieved.)

With the Biden administration committed to achieving significant healthcare reforms, the stocks of health insurers, especially those focused on Medicare and Medicaid, could perform well over the next few years.

Health Insurance Stock FAQs

What are the best health insurance stocks?

These three companies are some of the best in the health insurance industry:

  1. UnitedHealth Group 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.
  2. Anthem 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.
  3. CVS Health is not just a pharmacy retailer, it's 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.

Are health insurance stocks risky?

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, reimbursement pressure, and unforeseen medical costs.

How do insurance companies make money?

Insurance companies make money by both charging premiums and investing the insurance premium payments. Sounds simple, right? It both is and isn't. Every insurer makes a significant portion of its revenue by underwriting. Companies put some aside in reserve to ensure that they'll have enough to pay all claims anticipated, but then they invest the rest of the money.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends LHC Group. The Motley Fool recommends CVS Health and UnitedHealth Group. The Motley Fool has a disclosure policy.

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