Monday, February 5, 2007

Health-Care Stocks: Advantage Medicare?

News Analysis
February 5, 2007

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Health-Care Stocks: Advantage Medicare?

Growth in private, government-sponsored health plans could be a boon for some players in the managed-care industry

On Feb. 5, Humana (HUM) is slated to report fourth-quarter results. Analysts expect the health insurer to post earnings of 88 cents per share on $5.7 billion in revenue, up from 46 cents a share on $3.7 billion a year earlier, according to Reuters Estimates. The Louisville (Ky.) company will also likely be one of several outfits in the managed-care sector benefiting from recent growth in private Medicare plans.

Medicare beneficiaries have been able to receive their benefits through private plans since President Clinton signed the Balanced Budget Act of 1997. In 2003, Congress passed the Medicare Prescription Drug, Improvement & Modernization Act, which overhauled the rules for these programs and gave them the name Medicare Advantage (see BusinessWeek, 10/25/06, "Medicare's Big Experiment"). Now some analysts see signs Medicare Advantage programs could be a boon for investors seeking growth in the health-care market.

Rising Enrollment

More and more seniors are signing up for Medicare Advantage, recent reports indicate. As of the latest data, 19% of eligible Americans are enrolled in a private Medicare plan from Humana, UnitedHealth (UNH), or another provider, according to Citigroup (C). That's an increase from 11% in mid-2004. Citigroup projects 25% of seniors will have signed up for Medicare Advantage by the end of 2009.
Private Medicare plans offer opportunities for expansion in an industry where growth typically comes from market share gains, rather than new customers, analysts say. "Enormous growth prospects remain," says Citigroup analyst Charles Boorady in a Feb. 1 report.

He adds that the program's potential success may pressure other insurers like Aetna (AET) and Cigna (CI) to step up their efforts to grab a piece of the Medicare market. (Citigroup has investment banking relationships with Aetna, Cigna, Coventry, Humana, and UnitedHealth.)

Recent data could brighten the outlook for Humana when the U.S. Centers for Medicare & Medicaid Services (CMS) reports results this week. CMS issued figures on Jan. 31 indicating a hefty increase in Medicare Advantage enrollment. "We suspect that Humana may see earnings upside between a nickel and a dime during 2007 as a result of this increase in participation," says Prudential (PRU) analyst David Shove in a Jan. 31 report.

Smaller Players Also Benefit

The news for Humana improved a day later, when CMS clarified that the bulk of Medicare Advantage gains came in more comprehensive plans that include a prescription drug component. "The clarification from CMS should bode well for Humana's [Medicare Advantage] enrollment outlook," says Goldman Sachs (GS) analyst Matthew Borsch in a Feb. 1 report. (Goldman has an investment banking relationship with Humana.)

Big players like Humana and UnitedHealth aren't the only ones that might benefit from projected growth in private Medicare programs. Medicare Advantage makes up a more sizable portion of business for smaller players like Coventry Health Care (CVH) or WellCare Health Plans (WCG), so the impact on the those companies' bottom lines could be particularly notable.

Standard & Poor's equity analyst Phillip Seligman has a strong buy recommendation on Coventry, noting the Bethesda (Md.) company's emphasis on cost control (see, 12/4/06, "Coventry Health Care: Managing Very Well"). Seligman looks for revenues to increase to roughly $8.4 billion in 2007, from an expected $7.8 billion in 2006, helped by 5% to 10% higher Medicare Advantage enrollment.

Seligman has a hold recommendation on WellCare, but he projects even more dramatic private Medicare gains. He sees premium revenues rising about 33%, to $4.8 billion in 2007, after an estimated 97% surge to $3.7 billion in 2006. An expected 30% jump in Medicare Advantage enrollment could be a key driver of this revenue growth, Seligman says in a recent research report.

Dems May Change the Rx

Meanwhile, the latest data from CMS also include modestly encouraging signs for some drugstore chains. CVS (CVS) and Longs Drug Store (LDG) realized the highest organic percentage growth in prescription-drug plan enrollment among the top 15 plans, according to Bear Stearns (BSC). "While we believe profitability of the plans will be lower in 2006 than 2007 due to more competitive pricing, the enrollment gains represent a modest positive to partially offset," says Bear Stearns analyst Robert Summers in a Feb. 1 report.

To be sure, the long-term viability of Medicare Advantage business depends on the political environment. Leading up to last November's elections, some analysts expected the Democrats to push Medicare changes that might hamper stocks in the managed-care sector (see, 9/21/06, "A Game Plan for D.C. Gridlock"). "The government hasn't historically been a good long-term partner to managed-care companies," Morningstar (MORN) analyst Brandon Troegle notes in a Jan. 29 report.

In the meantime, though, Medicare Advantage plans might be the right prescription for growth.

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