Health-care Stocks: Medicaid insurers surge on Amerigroup deal

By Russ Britt, MarketWatch

LOS ANGELES (MarketWatch) — Medicaid insurers surged in early trading Monday, anticipating a reshuffling among health carriers after WellPoint Inc. announced plans to buy Amerigroup Corp. for a 43% premium.

Shares of Amerigroup /quotes/zigman/265070/quotes/nls/agp AGP +38.17%  , a player in Medicaid coverage, were catapulted by 38% after WellPoint /quotes/zigman/362231/quotes/nls/wlp WLP +3.17%  , one of the nation’s biggest insurers, agreed to pay $92 a share for the company, or $4.9 billion. Amerigroup shares were up $24.46 to $88.80 while WellPoint shares were up nearly 3% to $61.50.

Health insurer WellPoint is buying Amerigroup for $4.9 billion, bringing together two major health-care carriers. (Photo: Associated Press)

The news sent shares of other Medicaid insurers soaring, as the market apparently now expects more mergers in the wake of the Supreme Court’s ruling on President Barack Obama’s health-care overhaul bill. The ruling preserved the federal expansion of the Medicaid program for indigent patients, though the court ruled that it’s not mandatory for states to participate.

Fellow Medicaid insurer Centene Corp. /quotes/zigman/292665/quotes/nls/cnc CNC +19.32%  posted a 20% gain to $34.73 on the news. Other Medicaid insurers to bask in the glow were WellCare Health Plans Inc. /quotes/zigman/341770/quotes/nls/wcg WCG +18.47%  , which was up more than 18% to $62.39, while Molina Healthcare Inc. /quotes/zigman/317140/quotes/nls/moh MOH +16.78%  surged by 14% to $26.31.

Analysts said, however, that WellPoint wasn’t reacting to the Supreme Court ruling by making the deal for Amerigroup. The move allows WellPoint to have substantial lines of business in both Medicare and Medicaid.

But the deal will also allow Indianapolis-based WellPoint to benefit from the Medicaid expansion, analyst Chris Rigg of Susquehanna Financial Group said in a morning note to clients.

“There is uncertainty around states’ willingness to participate in the expansion program but if all states opt in, approximately 17 million uninsured lives are expected to be covered through Medicaid expansion,” Rigg wrote. He added that the new company would have a presence in the four largest dual-eligible states, with potential revenue of $100 million.

Deutsche Bank’s Scott Fidel concurred, adding that Amerigroup, headquartered in Virginia Beach, Va., was probably the best-positioned Medicaid player.

“This acquisition significantly enhances WellPoint’s Medicaid franchise providing the company with the best pure-play asset and management team in Medicaid managed care, in our view,” Fidel said in a note to clients.

Russ Britt is the Los Angeles bureau chief for MarketWatch.

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What Happened to Health Care Provider Stocks?

Leading up to and immediately following the Obamacare Supreme Court decision, most health care stocks and funds were in focus. Companies and ETFs in this space saw outsized trading volumes as a result, while many slumped as soon as the final decision was revealed.

Most of the health care firms have since rebounded with many segments of the important industry seeing their stocks rise by a few percentage points over the past week. However, one corner of the industry has stuck out as a big loser, unable to recoup its losses after the announcement; health care plans/HMOs (read Health Care ETFs in Focus On Obamacare Supreme Court Decision).

Overall, this has easily been the worst performing segment over the past week in the broad health care space as all of the biggest companies in the industry are in the red. This is in sharp contrast to the pharma, biotech, and medical device/instrument firms, which have all managed to start July on a strong note.

This trend is especially puzzling because of what the Obamacare ruling could do for the HMO space. Many analysts believe that the controversial individual mandate would be a boon for HMO providers as it would add millions to their rolls, with many being very healthy and younger individuals.

Seemingly, investors have instead focused in on the fact that children will get to stay on the parent’s plans and the new stipulations regarding a lack of lifetime care caps and rules regarding pre-existing conditions. These changes could potentially cancel out any benefits from the millions of fresh new clients and could possibly be the reason for health care plan companies’ slump after the Supreme Court decision.

Thanks to this negative sentiment, all six of the health care plan providers in the S&P 500 are down significantly over the past week. This includes a near 11.6% loss for WellPoint (WLP), 7.6% slump for Aetna (AET), a 7.1% slide in Coventry  Health Care (CVH), and a nearly 6% loss for the biggest of the bunch, UnitedHealth Care (UNH).

To me, this seems a bit overdone, particularly considering the solid performances that investors have seen in the rest of the health care space. After all, over the past week, the Health Care Select Sector SPDR (XLV) is actually up about 1%, demonstrating that the ‘sickness’ in health care stocks is pretty much only afflicting health care plans/HMOs at this time (see The Five Best ETFs over the Past Five Years).

Another factor to consider for the HMO space is the current Zacks Industry Rank. At time of writing, the HMO segment was currently ranked—admittedly in a rather large tie—for 106 out of 265 from this metric. This includes a few firms that are Ranked 2 or ‘Buy’ while it should also be noted that the segment has surged by about 50 places in the past week, suggesting that the underlying fundamentals for the space aren’t as bad as investors have experienced over the past few days.

While it should be noted that all this could change as we approach the summer earnings season, the space could still be an intriguing choice for investors looking for a beaten down sector in today’s market environment.

What do you think? Is now the time to get in on health plan providers/HMOs? Or should investors continue to hold out and put their cash to work in other corners of the health care market?

Let us know what you think in the comments below!

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Health care, bank stocks lead stock market lower

NEW YORK (AP) — Health care stocks tumbled Thursday after the Supreme Court upheld most of President Barack Obama's health care overhaul, falling along with major banks as Wall Street worried about the European debt crisis and the sluggish U.S. economy.

It had already been a bad morning for the market, which was dragged down sharply by news about regulatory investigations at Barclays, JPMorgan Chase, Citigroup and others.

Then, the high court upheld a key provision of the health care law, and the losses accelerated.

Although health care and finance dominated the headlines, the market's concerns were more widespread, stretching to numerous types of companies and economic data.

The Commerce Department said the American economy expanded at a 1.9 percent annual rate in the first quarter, a weak pace that isn't expected to pick up. The government also reported that unemployment applications fell last week, but only slightly, and analysts worried that the claims are still too high to indicate a recovery.

News Corp, parent of the Wall Street Journal and the 20th Century Fox movie studio, fell after it said it planned to split into two companies. Family Dollar declined after reporting that it missed analysts' estimates for revenue and profits.

Major indexes in France, Britain, Germany and Greece were down as the European Union met in Brussels. Leaders are trying to hammer out how to deal with the weakest countries, like Greece and Spain, but many of the previous meetings have failed to produce concrete plans.

"The first one thousand summits, I was pretty excited," deadpanned Jeff Sica, president and chief investment officer of SICA Wealth Management in Morristown, N.J.

David Lefkowitz, senior equity strategist at UBS wealth management research in New York, was also watching Europe more than the health care ruling or the bank probes. Health insurance companies make up only about 1 percent of the Standard & Poor's 500, he said.

And even concerns about the indirect effects of the health care law — like whether it will cause small businesses to curb hiring — can get overblown, he said. The much bigger cost of hiring is still salaries.

In the U.S., the Dow Jones industrial average fell throughout the morning. It was already down about 100 points by 10 a.m., 30 minutes into trading and just before the Supreme Court released its decision. It fell as much as 165 points later in the morning, then recovered some of those losses.

By 1 p.m., it was down 128 points, or about 1 percent, to 12,499. Thursday could be the Dow's second triple-digit loss this week.

The S&P 500 fell 13 points to 1,318. The Nasdaq composite index fell 43 points to 2,833.

JPMorgan was down 4.5 percent, more than any other company in the Dow index of 30 stocks. The New York Times reported early Thursday that a trading loss there, previously estimated at about $2 billion, could top $9 billion. JPMorgan's stock has lost 14 percent since then, compared to 3 percent for the Dow.

The U.S.-listed shares of Barclays plunged 15 percent. Regulators in the U.S. and the U.K. on Wednesday announced that the British bank would settle accusations that it had manipulated international interest rates, which are important because they affect how much consumers pay on mortgages and other loans.

On Thursday, banking stocks got another dose of unwelcome news when British regulators announced that their investigation had expanded to Citigroup, Britain's HSBC, Switzerland's UBS and the Royal Bank of Scotland'.

Financial stocks fell more than any of the other nine industry groups on the S&P 500, losing 1.7 percent in the afternoon.

Health care stocks fell 1 percent, led by sharp declines in insurers like UnitedHealth Group, WellPoint and Aetna.

But hospitals had the opposite reaction, with stocks rising notably at Hospital Corp. of America and Community Health Systems.

The reasons for the disparity weren't clear cut.

The health care law will require all Americans to carry insurance. So for hospitals and related industries, like companies that make surgical instruments or lab equipment, that can mean more customers.

It also means more customers for insurance companies. But some of those customers won't be as profitable as the companies might like, such as those who are already sick.

Even with the ruling in hand, there's plenty of uncertainty overhanging the issue. Small businesses aren't sure how much money to set aside now that more of them will be required to insure their employees. The health care law also doesn't address the overhanging problem of looming deficits in Medicare.

"It's not like we're at the end of the road here," said Gerard Wedig, a health care economist at the University of Rochester, "where our health care problems are solved."

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Our Outlook for Health-Care Stocks

The Supreme Court's decision on the individual mandate is looming, but its effect on stock valuations shouldn't be devastating in any scenario.Health-care demand should come out of its slump, buoyed by easy comps and deferrals, but the recovery is likely to be rather gradual. With mature geographies in stagnation, health-care firms continue to turn their focus to emerging markets.

Supreme Court Ruling Expected in 2012: We See Four Potential Outcomes,
No Devastating Impact on the Sector
The Supreme Court's early-Spring decision on the individual mandate is the key event on the horizon for the health-care sector, as much of the Patient Protection and Affordable Care Act's fate hinges on the ruling.

The Court has several questions to answer in reviewing the PPACA. Does Congress have the constitutional authority to require individuals to purchase health insurance, or else pay a penalty? If it does not, what parts of the reform law, if any, can stand without the individual mandate? Can the Court even rule on this matter before the individual mandate is enforced starting in 2014? The Court will also consider whether the Medicaid expansion will infringe on state sovereignty, although an appeals court dismissed this argument as the federal government is expected to pick up a big chunk of the total cost. The Court will not consider issues such as employer mandate or the validity of a health benefit exchange requirement.

Although we aren't making any predictions on the outcome of the Court's ruling, we stipulate the Court, particularly its "swing" judges, may take a pragmatic approach considering the total potential costs of unwinding provisions already in place. Some of the costliest programs are not scheduled to commence until 2014, but several important changes to the health-care delivery process have already been implemented. A number of them are also targeted for 2012, such as the rollout of Accountable Care Organizations (ACOs) and the implementation of Electronic Health Records.

We see four possible directions the Court could take. It could strike down the entire law; it could strike down just the individual mandate and related insurance market regulations while upholding the rest of the law; it could uphold the entire law; or it could postpone judgment until after 2014.

Even if the entire law is deemed unconstitutional, some aspects of reform will likely persist. For example, state-run online insurance exchanges have gained acceptance as a better way to organize the individual and small-group health insurance markets. Enhanced state scrutiny of premium increases is also probably here to stay. ACOs have established a foothold as the care delivery systems of the future. However, other major changes such as the expansion to Medicaid and individual insurance subsidies are unlikely to be resurrected in the current political environment, where health care has taken a back seat to concerns about budget deficits and the economy.

Alternatively, it is possible that only the individual mandate will be deemed unconstitutional. In this case, insurance market regulations such as guaranteed issue (forcing insurers to offer policies to all applicants) and modified community rating (only allowing premiums to vary within tight bands based on characteristics such as age and family size, while forbidding medical underwriting) would also almost certainly have to be eliminated from the law. Otherwise, people would wait until they became sick to purchase insurance, destroying the market for individual insurance nationwide. However, other major provisions of the law, including the Medicaid expansion and insurance subsidies, could be allowed to stand.

If the Supreme Court upholds the law, participants in the health-care system will have gained some much-desired clarity about the future regulatory environment. We believe most companies have been proceeding under the assumption that the law will stand. Preparation will likely accelerate as we approach the biggest changes in 2014.

Finally, there is some possibility that the Supreme Court will conclude that it cannot rule on the law because taxes used to enforce the individual mandate have yet to be collected. We view this as the least favorable outcome, as it would prolong the current state of uncertainty for years and create a tremendous potential mess if the law were later struck down after being fully implemented.

Enactment of the PPACA resulted in few changes to our fair value estimates, and it is unlikely that any of these outcomes would have a material effect on our valuations now, although a further delay and lack of clarity and certainty will likely steer investors away from the sector. With 2012 being an election year, any meaningful changes to the Senate composition and the White House could also complicate this issue. But barring wholesale political changes, we don’t anticipate the political environment to factor heavily into the health-care sector's performance in 2012.

Is Health-Care Demand Finally Returning? Yes, but the Recovery Has Hardly Been Gangbusters
We've been expecting health-care demand to recover in tandem with broad economic improvements, but the pace of the recovery has been surprisingly lackluster. Several factors are at work here, but the biggest issue remains a stubbornly high number of uninsured individuals as well as Medicaid recipients. Our stipulation for the demand bounce-back has long been tied to the decline in these two categories (and a corresponding rise in the volume of commercial insurance members).

With the latest nationwide unemployment rate at 8.3%, the prospects of a steep decline in the ranks of the uninsured are rather bleak; according to the latest Gallup-Healthways Well-Being Index, we are still looking at roughly 17% of the population without health insurance. Medicaid enrollment growth has tempered substantially since reaching its peak in 2009, but the current forecast by Kaiser still indicates a 4%-plus increase in 2012. On the plus side, commercial ranks are increasing, but at a rather pedestrian pace. With the private sector increasingly looking to shift a burden of health-care costs onto employees via higher deductibles and co-pays, demand improvement is rather tepid. (This is not a new trend but something that has been in the works for quite some time; however, its impact was less noticeable when the economy was booming.)

The good news? Demand for health-care services has been so bleak over the prior few years, it wouldn't require gargantuan efforts from health-care firms to post respectable (relative to prior years) volume growth in the current environment. In fact, thanks mainly to easy volume comparisons, most health-care firms expect the revenue to grow in the low- to mid-single-digits (ahead of the broad economy). And that's without an anticipation of a snap-back in many elective procedures that have now been deferred for three-plus years. This growth is partially due to the increasing efforts by health-care firms to penetrate emerging markets, where the emergence of a middle class is stimulating demand for better health care.

With Demand Still Slow in Developed Markets, Emerging Markets Offer Growth Opportunity
With U.S. demand still low and Europe reeling from austerity measures, emerging markets have become a crucial growth contributor for the sector in 2012 and beyond. China in particular has been in focus, given its tremendous overall potential as well as the government's growing emphasis on investment in health-care infrastructure. The Chinese health-care system is still characterized by gaps in access and quality between urban and rural markets, coastal and inland regions, and insured and uninsured patients. However, two years ago, the central government embarked on a reform effort, with an investment of $125 billion to accomplish five specific goals, including universal medical insurance by 2020 and improving infrastructure.

We see several dynamics that we think should contribute to continued robust growth of health-care spending in China. For example, new technology serves as the key profit center for providers, leading to quick uptake and extensive usage that correlates with improving patient wealth levels. The government also intends to improve health-care delivery through the renovation and construction of thousands of hospitals, health-care centers, and clinics, and we think medical device and equipment companies that can win a bid in the tender process at either the provincial or central level can benefit.

The latest five-year plan also identifies two sectors that will receive particular support: green energy and biotechnology. We anticipate a rapid build-out of research and drug development centers, which should be a boon to the lab-supply industry. With more clinical trials also migrating to China, demand for life science products should accelerate. Finally, China is set to become one of the most important growth drivers for Big Pharma over the next decade. Drug spending has grown at a compound rate of 22% per year over the past six years, and Big Pharma is poised to gain market share in this highly fragmented market. China is only the seventh-largest prescription drug market in the world, but it is expected to become the second-largest market in the world by 2015.

Our Top Health-Care Picks
Our top health-care recommendations cover most of the sector's industries, ranging from pharmaceuticals to managed care. These firms remain undervalued as the appetite for health-care stocks has yet to improve, despite favorable long-term dynamics.

Top Health-Care Sector Picks
Data as of 03-23-12.

Icon PLC(ICLR)
Star Rating: 4 Stars
Fair Value Estimate: $32.00
Economic Moat: Narrow
Fair Value Uncertainty: High
Price/Fair Value: 0.68
ICON's growing scale has helped it gain entrance into the upper echelon of the contract research industry, and we think the firm will continue to benefit from industry tailwinds provided by drug companies' increasing tendency to outsource clinical trial work. However, a slowdown in drug development spending has led to capacity underutilization and losses in the firm's central lab division, and hiring in anticipation of an uptick in demand has weighed on earnings. As demand comes back online, ICON should see high-single-digit top-line expansion and its operating margin return to the double digits by the second half of 2012 as it leverages its new staff and infrastructure across an expanded revenue base.

Abbott Laboratories(ABT)
Star Rating: 4 Stars
Fair Value Estimate: $70.00
Economic Moat: Wide
Fair Value Uncertainty: Low
Price/Fair Value: 0.86
In an effort to unlock value, management has decided to split Abbott into two--a branded drug company and a diversified health-care company. Although we don't expect the breakup to significantly change our fair value estimate, we still believe the company is undervalued, and the breakup could draw more attention to Abbott's attractive valuation. In the pharmaceutical industry, Abbott faces relatively minor patent losses during the next five years and is well-positioned to ride a strong tailwind of demand for its products. Most important, we expect continued strong demand for the company's top drug, Humira, based on low drug penetration in immunology diseases. Abbott's strong competitive position in nutritionals and diagnostics creates additional avenues of growth.

Covidien(COV)
Star Rating: 4 Stars
Fair Value Estimate: $76.00
Economic Moat: Narrow
Fair Value Uncertainty: Medium
Price/Fair Value: 0.71
As we've been advocating for several years, Covidien is spinning off its underperforming pharmaceutical business. We believe this transaction will allow investors to appropriately judge the company and its core device business. Covidien's device growth prospects are compelling as the latest product launches have been well-received by the marketplace, and the company successfully integrated a number of sizable acquisitions. Although a weak macro environment continues to hamper elective procedure volume, the company's revenue growth in the device segment remains strong, particularly in energy and vascular where Covidien continues to gain market share. With emerging markets also fueling growth, we expect strong revenue and earnings momentum despite ongoing investments in R&D and sales.

Roche(RHHBY)
Star Rating: 4 Stars
Fair Value Estimate: $52.00
Economic Moat: Wide
Fair Value Uncertainty: Medium
Price/Fair Value: 0.83
The long patent life of Roche's portfolio puts it among the biotechs least exposed to generic competition. Patents don't begin to expire until 2013--when Rituxan loses protection in Europe--and to counteract future competitive pressures, management is implementing strategies that we think will enable the firm to achieve 5% five-year earnings growth. Subcutaneous versions of Roche's blockbuster antibodies are in the works, which could reduce hospital costs and add to convenience. Novel drugs are in development that could improve on the efficacy of Roche's current products or represent new, personalized treatments for cancer patients. Roche also has a solid pipeline beyond oncology, including drugs to treat schizophrenia and hepatitis C. With the Genentech integration starting to yield synergies, we think Roche's drug portfolio and industry-leading diagnostics conspire to create sustainable competitive advantages.

WellPoint(WLP)
Star Rating: 5 Stars
Fair Value Estimate: $105.00
Economic Moat: Narrow
Fair Value Uncertainty: Medium
Price/Fair Value: 0.64
WellPoint's 14 Blue Cross and Blue Shield plans provide the company with a unique combination of regional and national scale. The former is the key to negotiating favorable provider rates, while the latter is essential for leveraging administrative costs. Investors remain fearful about the regulatory and economic headwinds facing WellPoint, causing the stock to trade at barely 8 times earnings and with a greater than 35% discount to our fair value estimate. However, we think these concerns are overblown, as the recent health reform law should have only a modest impact on WellPoint's future profits. Although we expect ongoing medical cost pressure, this should be partly offset by revenue growth opportunities and potential SG&A leverage. In the meantime, WellPoint generates copious free cash flow, which it is using to repurchase shares at a breakneck pace.

Alex Morozov, CFA, has a position in the following securities mentioned above: ABT

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Health Insurance Stocks For a Republican Win

NEW YORK (TheStreet) -- Investors busy assessing how the state of the global economy will affect their stock portfolios should start thinking about how the presidential race will weigh in.

In particular, investors may want to look at how to play the health insurance space.

Health care remains a subject of divide between the two parties, with Republicans trying to repeal Obama's nationwide health care reform since 2010. And, while it is unlikely they can overturn the entire law, they can certainly chip away at parts of it.

If Republicans take control, Citigroup estimates that large commercial providers of health insurance plans may see their earnings grow by 5% to 10%. That kind of growth would increase these companies' worth by 20%. The companies are currently estimated to see a 5% to 15% drop in earnings, according to a recent analyst report by the firm.

Within the broader managed care sector, which includes commercials plans, and Medicaid and Medicare plans, Citigroup says that valuations on most stocks should tack on at least an additional 2 multiple points. If a Republican fails to win the presidential seat but the party gains control of the senate, the valuation of the group would add up to one point.

This is all good if Republicans make a sweeping win, but what if President Obama takes office for second term? Even then, investors may benefit yet.

"The market seems to be discounting maintenance of the political status quo," writes Citigroup, which estimates that managed care stocks are trading under the 9.5x 2012 earnings estimates.

Investors may want to skew their picks toward companies providing commercial plans. Under a Republican victory, Citigroup says stocks that would benefit most in this category rank in the following order: WellPoint , Coventry Health Care , UnitedHealth Group , Aetna , CIGNA and Health Net .

For Medicare plans, the firm picks Humana , HealthSpring , Universal American and WellCare . All these companies provide elderly with Medicare through private health insurance plans called Medicare Advantage.

The idea behind investing in the above Medicare plans is that Republicans have historically encouraged seniors to enroll in Medicare Advantage programs. In addition, Citigroup notes that Republicans have been willing to give the programs a fair reimbursement. By contrast, under Obama's reform, government subsidies to the Medicare Advantage program would be gradually eliminated altogether.

On the Medicaid end of the spectrum, stocks are a tougher pick. Republicans might impact Medicaid in two ways:

The Medicaid market is expected to increase by around 30% in 2014, according to Citigroup. But, Republicans may try to do away with this expansion and cut back the money that states use to fund Medicaid programs. A company like AMERIGROUP , with a $3.3 billion market cap, for example would lose a whopping $2.5 billion in revenue, according to Citigroup.

Even so, Citigroup say that Medicaid companies would still prefer a Republican administration to a Democratic one. "Republicans are much more philosophically aligned with moving the care of the dual eligibles into managed care organizations," writes the firm.

What that means is that that those qualifying for both Medicare and Medicaid benefits maybe more inclined to find Medicaid programs under a Republican administration. According to analysts' estimates, that opportunity would deliver more than $320 billion in revenue per year for Medicaid managed care providers. By contrast, Medicaid revenue would only add over $40 billion without dual eligibility.

The bottom line is: Keep an eye on opportunities within health insurance providers, particularly commercial providers, if you believe Republicans will win the election this year. But if you believe otherwise, the space is still worth your consideration.

-- Written by Chao Deng in New York.

>To contact the writer of this article, click here: Chao Deng.

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Doll Favors US Energy, Health-Care, Technology Stocks

Jan. 31 (Bloomberg) -- Robert Doll, chief equity strategist at BlackRock Inc., talks about the outlook for Europe's debt crisis, U.S. stocks and his investment strategy. Doll also discusses China's economic growth and emerging markets. He speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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