The courtroom drama being played out in the Supreme Court regarding President Obama's health-care reform initiative has been rough on health-care stocks. As the justices ponder whether to uphold all, part, or none of the president's Affordable Care Act, many wonder whether insurers will fare better with or without the individual mandate. The answer, it seems, might just be "both."
A study by Bloomberg noted that, despite health insurers' griping about and lobbying against health-care reform, the concept has already padded their bottom lines. Health-care entities on average have all seen their margins and profits increase since the health-care law was enacted in 2010. Even if the law was struck down in its entirety, I can still see ample reasons for this trend to continue.
For one thing, many large insurers have moved to solidify their positions regarding Medicare law changes, which will probably occur with or without changes to the health-care law. With baby boomers beginning to retire, Medicare profits are set to soar. Both UnitedHealth Group (NYS: UNH) and Cigna (NYS: CI) have made strategic acquisitions with this knowledge in mind, and WellPoint (NYS: WLP) procured a lucrative Medicare-Medicaid government contract last fall that's worth $273 million over a five-year span. Last summer, Aetna (NYS: AET) bought Genworth's supplemental Medicare insurance arm and may be planning more of the same with its $1.2 billion nest egg set aside for acquisitions.
Another plus is that many states are pursuing the portion of the ACA that calls for expanding health-care coverage. Only 15 states have no legislation either passed or pending in regard to widening health-care coverage, which means a lot more business for insurance providers in the near future. The creation of health-insurance exchanges through which residents can choose a plan also bodes well for the fortunes of eHealth (NAS: EHTH) , a large online insurance broker that's been busy grabbing contracts to assist states with the development of these exchanges. The company already runs the federal government's health website and was among the first publically traded companies to capitalize on the opportunity after the reform law was passed.
All of these companies have taken pains to position themselves to take advantage of the health-care law in whatever form it may finally take. The state exchanges created to expand coverage will be quite a boon, since it seems clear that they will be used -- even if the decision comes down against individual mandates.
I think that if the mandate is kicked out, then so will the new restrictions on insurance companies regarding awarding coverage, but that's a risk investors must consider. Even so, these big health-care entities aren't accustomed to losing and may get the new customers they covet by way of swelling Medicare ranks and the state-based exchanges.
Health care is certainly in the spotlight right now and will be for some time. Keep pace with this fast-changing and profitable sector by discovering a stock Motley Fool co-founder David Gardner believes is the Next Rule-Breaking Multibagger. Download your copy of the free report now, before the market catches on to this game-changing company.
At the time this article was published Fool contributor Amanda Alix owns no shares in the companies mentioned above. The Motley Fool owns shares of WellPoint. Motley Fool newsletter services have recommended buying shares of WellPoint and UnitedHealth Group and creating a diagonal call position in UnitedHealth Group. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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