First-quarter financials for UnitedHealth Group (NYSE: UNH), Anthem (NYSE: ANTM), and Centene (NYSE: CNC)show that sales and profit are climbing in spite of Obamacare headwinds. Can insurers continue their winning ways if Donald Trump repeals and replaces the Affordable Care Act?
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In this clip from the Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes and contributor Todd Campbell discuss how these top insurers are racking up growth and what could be next for the industry.
A full transcript follows the video.
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This video was recorded on April 26, 2017.
Kristine Harjes: Let's pivot now to the insurer side.Todd,this was your idea, you wanted to talk about post-100 days of Trump, we'recoming up on it, it's in less than a week at this point. How are the major health insurers doing?
Todd Campbell:We're on Trump-100-day-watch,and we want to know what the impact is on insurers. We came into 2017expecting that there would be arepeal-and-replacement dealput forth in Washington. I was a little surprised thatit happened as quickly as it did. But sure enough, things are hard to do when you're talking about winningsupport from so many different people in both the House and,potentially, later on, in the Senate. As a result, that derailed Trump's first foray to try and repeal and replace. That wascalled the American Health Care Act, which you and I, Kristine, discussed at some length in a showa couple of months back,if anybody wants to go back and listen to that. Obviously, aspart of Trump's policy agenda,health insurance was going to be a huge part of that. So I thought it might be helpful to go back and say we're one quarter in, Q1 in the books -- how did health insurers do? Was there any evidence that Trump'selection was a good or bad thing? Or is it just business as usual?
Harjes:Right. Let's start, first off, with UnitedHealthcare, who we'vealready mentioned a little bit on this show today, that they are anenormous health insurer in the United States. They'rekind of an interesting case because they basicallyopted out of Obamacare by saying, "We'renot making any money here, so we'd rather not; no, thanks." Thatput them in kind of an interesting position looking at healthcare reform,because you would think thatbecause of their lack of exposure to Obamacareit wouldn't really affect them much whetherObamacare was repealed and replaced or not. How did that end up panning out?
Campbell:It's all upside for UnitedHealth; think about it that way. They were losing money on theObamacare plans, so they stoppedselling them. That brings some back to flat. Now, if areplacement plan gets put in and,theoretically, it becomes morefavorable to insurers --which, I think, broadly speaking, people were anticipating that it would be moreprofitable for insurers, because you need to have insurers play ballin order to have any kind of a system succeed. So I think there was a potential for a lot of upside. Butit's really just business as usual for UnitedHealthcare in Q1. This is,like you mentioned, a Goliath. They're expected to do $200 billion in revenue this year. If you look at their Q1 numbers,premiums alone were up 12% to $39 billion. They made12% more on premiums year over year in the quarter. Of course,that translated into earnings growth, too. You had non-GAAP EPS that wasreported in the quarter of $2.37. That was up 31%. So you have earnings growing much more quickly than revenue, and both of them growing solidly in the double digits.
Harjes:Right. As you mentioned, UnitedHealth is extremely diversified; they are huge. Let'slook at the other side of the spectrum there, at a more niche player likeCentene, who is mostly a Medicaid player.
Campbell:Centene is an interesting story, too. If the replacement plan had been put into place, then you'd be wondering, what's going to happen withMedicaid expansionstates? Centenegets the majority of its business fromrunning Medicaid programs for different states. Part of the replacement plan was to cap enrollment inMedicaid expansion states in 2020, and block-grant money to states from there on,which would create a significant amount ofuncertainty for their business. Again,since this is on hold, it's business as usual for the company. Theyreported strong revenue growth,but again, that's a little messy,because they did an acquisition last year. So it's probably better to look at their EPS growth. In the quarter, theirearnings growth was up 51%; they reported $1.12 in non-GAAP EPS. So this is a company, obviously, that'smaking some money. It's important to recognize thatnot only are they interesting, at a minimum, torecognize that UnitedHealthcare has said, "Wedon't want to have any part of Obamacare," Centene has said, "Wethink it's a good business to be in. In fact, we're looking to expand ourparticipation in it in 2018,assuming thateverything continues as is." They handle about 1.1 millionObamacare enrollees, and that's up from around 680,000 last year.
Harjes:Twocompletely different approaches. Let'stouch on one more. I'm picking them because we were just talking about them in the PBM section. How about Anthem?
Campbell:Anthemjust reported this morning. Unfortunately, I wasn't able to listen to the conference call yet. It'son my agenda for later on. ButI did go through and tear through the press release. Again, like UnitedHealthcare --UnitedHealthcare is the biggest,Anthem is the second biggest --everything seems to be going well. Anthem stillparticipates in Obamacare; they offer plans in a dozen or so states. They reported total revenue was up 11% to $22.5 billion. Strong, double-digit year-over-year growth again. Their non-GAAP EPS in the quarter was $4.68, which was up 35% year over year. So regardless of all of the otherchatter that we hear aboutObamacare, not Obamacare, whatever, you look at UnitedHealthcare's results and Anthem's results, and from agrowth perspective on a top and bottom line, they'rekind of comparable. Itdoesn't seem like not participating orparticipating is really that big of a needle mover,in terms of how much these companies are growing year over year.
Harjes:Yeah,that's interesting. One other point thatstood out to me when I was looking at this,I was looking earlier today atdifferent lobbying budget across healthcare.America's Health Insurance Plans, a lobbying company,decreased their budgetgoing from 2016 to 2017, which really stood outin contrast to what some other healthcare lobbyists were doing. That was a 25% decline in theirbudget. Of the top 25 spenders in that area, they were one of just four to cut their budgets. This is a grouprepresents Anthem, Cigna,Centene, Humana. I don't know,I just think it's a really interesting dynamic,to see what's going on in Washington,how are the different lobbyists reacting to it,how are the different insurers reacting to it, and how are thestock prices reacting to it? This isabsolutely still something that remains in limbo, but it's still fun to tease of theeffects of the chatter.
Campbell:Yeah. Ofall of these companies we discussed today,if you want to go back and read one earnings transcript for interest, go read Centene's,because they really put this front and center and talked a lot about Obamacare, and how toughit might be, or, the challenges that might be, to unwind it and get a replacement planacross the finish line. This is notgoing to be easy. The AHCA, theydidn't vote on it yet, there's a lot of chatter that it may be brought back out in front oflegislators to vote on. Who knowshow that middle ground will be found in the House,and then it's going to go to the Senate, andmiddle ground has to be found there. I don't know. I think the point that Centene's management was trying to make is, we're ready toadapt to whatever the market throws at us. As it stands today, we're OK andwe're doing fine. If it changes, we'll adapt to it.I think that's a big takeaway forinvestors. Never underestimate insurance companies'ability to adapt to a changing marketplace.