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Investing in Health Insurance Stocks

Updated: Sept. 20, 2021, 11 a.m.

Investing in companies that offer products and services people must have can be a smart wealth-building strategy. And, 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.”

Top health insurance stocks for 2021

Here are three 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.

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, 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 in 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 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). 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 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. 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 as to how the pandemic could impact medical costs in the future.
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, the 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.

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.

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