Market Share Trumps Chaos

The health care marketplace probably couldn’t get more chaotic for consumers, but already it’s clear who are the winners: health insurers. Despite delayed deadlines, policy reversals and technical glitches in the rollout of the new law, the two largest insurance companies in the greater Valley, Health Net Inc. in Woodland Hills and Anthem Blue Cross in Thousand Oaks, have seen their stock price substantially appreciate. The bottom line: the long-term prospect of more customers tops any problems, no matter how severe, with the law. “This is an opportunity to get as much market share as possible,” said Dylan Roby, director of the Health Economics and Evaluation Research Program at UCLA. “In general, Anthem and Health Net have both jumped feet first into the Covered California exchange and managed care markets.” Last week, President Obama roiled the insurance market, saying insurers could extend for another year individual policies that don’t meet the new law’s requirements. The decision came after voters complained about policy cancellations. But underneath the political flap, the share prices of the two insurers continued to gain. Since the announcement, Health Net has gained about 3 percent and Indianapolis-based WellPoint Inc., the parent company of Anthem, is up more than 4 percent. In the last 52 weeks, Health Net has given investors a return of nearly 20 percent, while WellPoint has yielded more than 72 percent. And analysts like the stocks. While both companies are benefitting from reform, they have focused on different segments of the new online exchanges, which allow individuals and small businesses to search for standardized coverage. In the individual policy segment, Health Net usually ranks among the three least expensive plans, putting it in position to grab cost-conscious customers. “A lot of people coming into the market are lower or middle income and while they may get federal help, they don’t want to pay a lot out-of-pocket,” said Roby of UCLA. “Health Net could end up with a lot of newly insured people.” Roby expects insurers will face a rush of claims by uninsured people who get health coverage, but once that pent-up demand is met, demand for services will level off after two or three years. In contrast, Roby said Anthem ranks among the top insurers in terms of price. He speculated that over time, the individual exchange could evolve into a two-tiered market, with Anthem, non-profit Kaiser Permanente and a few other companies competing for the high-end, high-margin individual market, while Los Angeles County’s L.A. Care Covered, Long Beach-based Molina Helathcare Inc. and Health Net would compete farther down. Sarah James, an analyst at Wedbush Securities in downtown Los Angeles who covers both WellPoint and Health Net, said overall health insurnce has been one of the most upbeat sectors on the S&P 500 this year, rising about 11 percent. Consulting firm PWC estimates the national health insurance market will grow by 30 million people, and investors expect that will translate to higher revenues. “While it seems like there’s a lot of uncertainty about reform, we understand more than we did six months ago,” James said. “People are comfortable making projections and that does a lot for multiples and share price. People are looking at the topline growth with new people coming into the system.” Resource pools For Jenn Moore, vice president of Affordable Care Act transition planning at Health Net, the challenge is serving those new customers efficiently and profitably. Moore said health reform has changed every aspect of Health Net’s business, from technology to HR. On the customer end, the company has commissioned a vendor to create videos that teach newly insured customers how to select a primary doctor and make payments. The sales staff has shifted from helping individuals craft custom policies to answering questions about standardized policies available on the exchange. On the back end, the company’s computer systems and compliance rules have been retooled to conform to new regulations. “The Affordable Care Act has had a massive impact on Health Net,” Moore said. “In terms of impact on the Woodland Hills operation, we have a lot of people participating in the resource pools, either planning or executing them.” Moore added that the rule-changing and delayed deadlines have meant a lot of frantic work. Specifically, the staffers at the Woodland Hills office are “very busy,” and she expects they will continue that way for months. Indeed, it has been bumpy. In its most recent quarterly filings on Nov. 7, the company outlined the financial impact of the newly emerging insurance market. The company reported general and administrative expenses jumped 22 percent to $268 million over the same quarter last year. Also, the company found that people weren’t signing up for policies as they waited for health reform to take effect. That prompted the company to lower its full-year commercial enrollment guidance from a decline of 8 percent to 9 percent to an expected decline of 11 percent to 12 percent. In the two days following the announcement, Health Net stock declined 7.8 percent. Since then it has regained about half that loss. James, the analyst at Wedbush, said the decline in stock price was large because of a fundamental difference between Health Net and its competitors. The new law imposes a tax between 2 percent and 2.3 percent on insurance companies, and most have passed the added cost directly to consumers. But Health Net decided to not pass them on in all categories. “The reason it traded down was they didn’t clearly communicate how this decision would affect their margins,” James said. However, other analysts see an opportunity. Among the 16 analysts who cover Health Net, seven give it a “buy” rating, seven a “neutral” and two a “sell,” according to Thomson Financial Network. The average price target is $33.93. For WellPoint, seven analysts rate it a “buy” and 13 “neutral.” The average price target is $95. Last week Credit Suisse increased its target price on Health Net from $35 to $76. The new target represents a premium of more than 160 percent over Health Net’s current price. Anthem Blue Cross did not make an executive available for interview, citing “the drastic change in health care reform that has happened over the last week,” a spokesman said. In its most recent quarterly filing on Oct. 23, parent company WellPoint reported net income of $656 million ($2.16 a share), beating analyst expectations of $559 million ($1.82). Revenue grew 17.2 percent to $17.7 billion. That prompted the company to raise its 2013 membership and earnings per share guidance. Chief Executive Joseph Swedish cited the company’s “strong performance” and outlook due to federal health reform in raising guidance for the rest of the year. During the quarter, the company saw administrative expenses rise nearly 31 percent to $2.2 billion, but discounted the jump as a necessary adjustment as customers switched to new plans. “We have been working on this for a couple of years now – we knew that there would be some choppiness going in,” said Ken Goulet, executive vice president of commercial and specialty insurance, during the call. “We have a number of folks ready to assist our customers.”