Bank on positive outlook for managed care stocks

December 1, 2011

Lower utilization and steady service costs bode well for managed care overall.

All things considered, 2012 will likely be a good year for managed care stocks. The ongoing uncertainty surrounding health reform's individual mandate and other macro issues will generally cause ripples for managed care organizations next year but not tidal waves.

"It mainly comes back to the fact that we're still in era of pretty low utilization, and on top of that, we're seeing relatively healthy pricing in the market," he says.

At the local level, some are concerned that the increasing empowerment of certain states to review and reject premium rate increases will weigh down managed care's ability to manage margins successfully. Gordon says there's a lot of noise around premium increases now, and the true test of the effects can be found by looking at each company's book of business in terms of geographic distribution and how aggressively the respective states are regulating rates.

"Companies are getting reasonable rates," he says. "The low-utilization environment is helping as well."

Another unfolding trend comes from the merger and acquisition activity of late. Not only are health plan organizations looking at other insurers as acquisition targets, they're eyeing non-endemic lines of business such as IT companies, provider practices and clinical facilities.

"Managed care companies generate a tremendous amount of cash, and the cash flow has been far more than they can deploy into existing business," Gordon says. "That gives them the opportunity to give money back to shareholders or increase asset base."

He says in a static market, plans can steal marketshare but that must be done through price competition, which hurts margins. Plans are better off maintaining their prices and seeking ways to build up assets instead.

MEDICAID MARKET WORTH A LOOK

Gordon sees the long tail of managed Medicaid companies as one of the largest and more accessible acquisition possibilities.

"There are few other areas you could say that about," he says. "Centene, for example, could be three to four times its size in terms of revenue and earnings."

Certainly buying up other payers is one way to leverage scale, but according to Gordon, there is more money than opportunity to make such acquisitions now. Hence, the trend toward buying provider businesses.

"By doing that, they are also trying to change the system so they can contract in different ways and go more toward global payment systems," he says.

He sees the provider-acquisition trend lasting five to seven years. However, he also advises that payers shouldn't go too far afield. If a managed care organization buys a new line of business that lacks natural synergy, the return might be far less than expected.

Julie Miller is editor-in-chief of MANAGED HEALTHCARE EXECUTIVE. She can be reached at julie.miller@advanstar.com