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September 25, 2023

Wall Street analysts bet on future for insurers, devicemakers and maybe hospitals

Wall Street analysts bet on future for insurers, devicemakers and maybe hospitals

Modern Healthcare | Shelby Livingston

Wall Street analysts say the future looks bright—and lucrative—for insurers and medical devicemakers, but it’s a more complicated story for hospitals.

Low medical costs and a booming Medicare Advantage enrollment have helped boost health insurers’ top lines, A.J. Rice, managing director of equity research at Credit Suisse, said during a panel discussion Thursday hosted by the Nashville Health Care Council.

All five major national health plans are gaining share in Medicare Advantage as seniors age into the program at a rapid clip, he said at the Nashville Healthcare Council. And analysts expect the insurance companies, most of which will report quarterly financial results in the next couple of weeks, to reap big benefits from the GOP tax overhaul that reduce the corporate tax rate from 35% to 21%.

The nation’s biggest insurer UnitedHealth Group said it expects to gain an extra $1.7 billion in earnings in 2018 thanks to the tax reform.

Meanwhile, medical device makers are benefiting from the slashed corporate tax rate, as well as the two-year delay of the 2.3% medical device tax.

Kristen Stewart, a director at Deutsche Bank, said device manufacturers have said they plan to invest those tax reform savings back into U.S. jobs, and research and development.

Low medical costs and utilization may have helped insurers’ bottom lines, but those trends have hampered the provider industry. Acute-care hospitals’ financial results have been dampened by lower admissions. But Nephron Research Analyst Joshua Raskin said strong pricing has helped offset those effects.

“The perception on the acute-care side is probably a little worse than what’s actually being seen in the market,” Raskin said.

More will be revealed on this front with public for-profit hospital chains releasing their earnings reports in coming week.

Ambulatory-care providers are benefiting from the insurance industry’s push to deliver care in cheaper outpatient settings. Home healthcare providers are positioned best because care delivered in the home is often the lowest cost, said Frank Morgan, managing direct at RBC Capital Markets.

Insurers making their move

Insurers see the value there. Humana and two private equity firms have announced they are buying home health and rehab provider Kindred Healthcare for $4.1 billion. And UnitedHealth’s Optum unit is buying dialysis provider DaVita’s medical group for $4.9 billion, after early last year announcing a plan to buy Surgical Care Affiliates for $2.3 billion.

Many healthcare companies that are merging with, or acquiring others are seeking to integrate vertically, and are taking on unusual combination, including insurers are merging with providers, and a major pharmacy chain are combining with payer.

“We are at a point in the cycle where the typical consolidation has not really been happening, especially on the health plan side,” Raskin said. Now, “you’re finding that part of the cycle where strange bedfellows are going to get together.”

CVS Health and Aetna’s attempt to merge in a bid to lower healthcare costs were greeted skeptically.

In the $69 billion CVS-Aetna tie-up, CVS hopes to turn its retail pharmacy locations into full-fledged urgent care clinics, but “there are just not that many primary care doctors sitting around waiting to be hired by MinuteClinic,” Rice argued.

“The things they’re talking about doing are interesting long-term, but they’re not going to be easy to do,” he said.

ACA death spiral ‘exaggerated’ 

The analysts were positive on the future of the Affordable Care Act exchanges, despite the recent elimination of the individual mandate penalty. Though final open enrollment figures aren’t yet available for both federal and state-based exchanges, Rice said he expects individual ACA enrollment to be flat this year. Most who signed up are highly subsidized or have chronic conditions and know they need insurance, so it’s likely the exchange have reached an equilibrium, he said.

“I think the pool itself is actually starting to stabilize,” Morgan said. “This worry about the death spiral is probably a little bit exaggerated.”

Analysts also touched on the changes that consumerism will bring to the healthcare industry. Demands for more transparency in healthcare cost and quality will be good for some providers and bad for others, Raskin said.

“If individuals are going to be armed with the actual data around cost and quality, you’re going to see market share shifts,” Raskin said.

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