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Invest in efficiency and consider big data
It is no surprise that health plans have been overperforming on Wall Street for the past few years during the rollout of the Affordable Care Act (ACA). In the past year, share prices of Aetna, WellPoint, UnitedHealth, Humana and Cigna have increased 32% on average, according to The New York Times. Share prices of UnitedHealth, Cigna and Aetna have all increased by nearly 100% since the ACA was implemented in 2010, according to CNNMoney.com. Overall, healthcare stocks have outperformed the S&P 500 by 15 percentage points since the ACA was passed.
“And they are going to do fine in the next year also. When the dust settles with the ACA, they will all end with new customers. It will not be an easy process,” says economist and author J. D. Kleinke, who is also an MHE editorial advisor.
Many of the new enrollees will be subsidized by the federal government. And enrollment numbers for 2014 and beyond are more than what the typical market would support.
“Wall Street knows this and understands that this is growth for a bunch of mature companies,” Kleinke says. “Especially when it comes to the new laws surrounding pre-existing conditions. Health plans stocks aren’t going to do anything but get better.”
He also says the influx in new members from the individual market will be a healthy boost to bottom lines for years to come; the key is to be able to manage the risk of higher health costs for the newly ensured populations.
“The pathway to growth is the young, sick and the reluctant, and many of those will need Medicaid or managed care. As more people end up with Medicaid, there will be managed care tools, and health plans will get bigger, but will also have to be smarter,” Kleinke says.
Plans will need strategies to deal with high-risk patients and the frequent visitors to the emergency departments. Many in the newly insured population are in the habit of accessing the ED for routine care.
“Unmanaged Medicaid is going to be the struggle, and big health plans don’t know how to manage it,” he says. “When you add 100 people to the ACA, at least 50 of them will need to be managed. It won’t net the biggest profits, but there will be enough top-line growth to make a difference.”
However with so many new members, there will be uncertain risk. Health plans cannot rely on ACA-related membership growth in the long term, says Scott Pickens, managing director of Arlington Healthcare Group.
“If you define growth as increased operating margins or profit then you are dealing with a whole different set of challenges,” he says. “For example, many if not most health plans competing on the public health exchanges set first year premiums assuming they will initially lose money while the associated risk pools settle out and actuarial experience can be more accurately applied to premium calculations. Further, with minimal medical loss ratios now being set by law and regulation, health plans have much less wiggle room to squeeze out a stock-market acceptable operating margin when medical costs vary upward.”
Pickens says many have begun diversifying their revenue streams. Particularly the large national plans have for years been evolving away from being pure payers and claim processors to being integrated providers of a variety of health related and industry supporting services.
“These include everything from health data and information services, population health, occupational health, to full integrated care management utilizing business combinations with hospitals and health plan owned physician networks,” Pickens says. “The stock market sees opportunity for those health plans who are becoming full service providers of both direct and administrative health related services to their members.”
Big data is a buzzword that has many healthcare investors either excited or running scared. With mountains of claims data, many see this as the time to start investing in ways to repurpose the data. Though smaller plans may find it harder to invest in proprietary data mining software and services, Pickens says that larger companies will be able to develop the technology that integrates clinical science, care coordination and cost sensitivity.
“Larger health plans-especially those integrated with some provider capabilities-are arguably the best suited to address this emerging ecosystem. They have the core skills, the executive and managerial expertise, and the scale required,” he says, adding that products addressing population health, chronic disease management, episodic care, and rehabilitation that require new levels of data integration will be the most costly, yet quite profitable.
Though Kleinke agrees that more pinpointed managed care will provide profits, he says that the hype over big data will fade in the upcoming years.
“Health plans have been trying to make money off of information for years. They have always tried and never been any good at it,” Kleinke says. “There’s too much competition with businesses that are really good at it.”
Small businesses and independent data companies sell their analytical services and products to several industries as a core competency. Health plans generally don’t do well selling to their competitors, he says.
Kleinke also says that health plans would have to invest more money and effort into creating industry-standard big data products and will ultimately jump ship after a lack of profits.
“The typical shareholder may not have been around 10 years ago when health plans tried to sell data before. Two or three years from now, everyone will be rushing back out of the data business, it’s just the organic nature of the market,” he says.
But the return on big data will come from long-term efforts, Pickens adds. “Health plan stockholders will need patience to see the benefits of investments in big data. And the benefits while I believe very real may be difficult to attribute directly to big data investments as separated from other contributing factors,” he says.
Health plans will also have more opportunities to manage government-subsidized programs, which will require them to manage healthcare costs. An increase in members without experience in the healthcare system might cause a spike in costs that could slim profits. That’s another place big data comes in, according to Pickens.
“The return on investment will manifest as lower healthcare cost as illness is avoided, treatments are more effective more quickly, and the enormous waste from less than effective treatment is gradually diminished,” Pickens says. “Therefore the impact on health plan revenue stream may be somewhat hidden and the greater impact will show up in operating margin.”
Kleinke says finding ways to manage primary and maternity care and specialty prescription are areas health plans can maximize efficiency.
“People are skittish, and this issue flies under the radar, particularly with Medicaid, where almost half of the women hospitalized for pregnancy,” Kleinke says. “It is the number one reason women go to the hospital; to deliver a baby. There are way to many C-sections and induced births and a lack of prenatal care. And nobody manages it well. It doesn’t get a lot of attention, because people don’t see it as problematic, and there is hesitancy because there are a lot of cultural and political issues surrounding maternity care. Actually, basic prenatal care will yield better outcomes, healthy, happy members and lower healthcare costs. It’s like the Holy Grail.”
As the healthcare industry continues to diversify into more information and clinical technology, experts agree that many companies have an opportunity to capitalize on developments. Though insurers are excelling, biotechnology companies are soaring-up 60% in 2013 on the S&P 500, according to CNNMoney.com.
“These new concepts are not coming from health plans,” says Kleinke. “They are coming from entrepreneurs, technology, and more community-based care. This kind of care can happen on an iPhone.”
Pickens says that though 2014 and 2015 will see the largest influx of ACA members, an increase in high deductible plans may also slow operations and cash flow for health plans. “On the other hand, I suspect that many health plans are (often intentionally) underestimating adverse selection when setting premiums as they try to enter the competition for new members under the ACA with the intent of making it up later as the new risk pools stabilize and are better understood,” Pickens says.
Ultimately, new revenue streams in development now and the past few years will be the best way for health plans and stockholders to combat the potential bottleneck.
“I expect that those plans that are farther along in development and marketing of these services to benefit as they are early to a very large potential market,” Pickens says.