Checking The Temperature Of The Health Insurance Sector In the Age Of Trump

With the Dow cracking 23,000, thanks in part to strong weekly performance from UnitedHealth Group and Johnson & Johnson, health care stocks were riding high. But, as President Donald Trump cracks down on cost sharing reduction payments for health insurers and resets some of the ways consumers can get health insurance, will those moves help or hurt health insurance company stocks and funds?

Right now, health insurance stocks are going great guns.

The benchmark Health Care Select Sector SPDR Fund (XLV - $17 billion in assets) is up 19.90 percent on a year-to-date basis, while the Vanguard Health Care Index Fund (VHT - $8 billion in assets) is up 21.3 percent so far in 2017.

Certainly, Trump doesn’t expect health insurance stocks to flourish after his series of executive actions that cut what he called “bailout” payments to health insurers and made it easier for individual health insurance consumers to bypass the Affordable Care Act (ACA) to get health insurance. Those moves could drive more health insurance carriers out of the government-run insurance exchanges, industry experts warn.

Consider this tweet from Trump on Oct. 14, 2017. “Health insurance stocks, which have gone through the roof during the ObamaCare years, plunged yesterday after I ended their Dems windfall!”

Decline they did. Aetna (AET) saw its share price fall seven percent from its September highs after the Trump ACA changes. Cigna (CI) saw its share price drop by 3.5 percent from its early October highs. And UnitedHealth Group (UNH), which has beaten quarterly analyst estimates for 15 quarters in a row, saw its share price fall by four percent over the same time frame.

As Trump puts the ACA on the chopping block, there are some new opportunities for sector growth that weren’t really there before, investment experts said.

“Trump's recent action may help smaller insurance companies and those who embrace change,” said Gary L. Whiddon of American Alliance Insurance Brokers in Westlake Village, Calif. Whiddon is a certified financial planner with 23 years of experience in the health care field.

Whiddon cites reinsurance companies such as Munich Re as an example of an insurance firm that may benefit from the Trump changes to the ACA. “The move to association plans could help Munich Re, since partially self-funded plans may flourish,” he said. “Captives may be formed to increase the stop-loss insurance deductibles and bring down the cost.”

Large insurers will lose market share in the individual health market, but may grow in small group coverage since Anthem pulled out of California, leaving Blue Shield as the only preferred provider organization, Whiddon added. “Blue Shield only offers their limited PPO network called Tandem that has only 58 percent of their full PPO network,” he said.

Health reimbursement arrangements (HRAs) also could pop in the coming weeks after the Trump changes go through. HRAs are very flexible and they provide first dollar coverage for employees so employers can buy a higher deductible plan,” Whiddon said. “Supplemental products like Aflac and Colonial Life offer will grow to reimburse employees for high out-of-pocket exposure. In 2018, we are already seeing plans with $7,350 out-of-pocket costs.

Other health sector experts expect little change in health insurance stocks and funds, given that virtually all ACA uncertainty already has been priced into health insurance company stocks.

“Investors and company executives have long been wary of changes that have come and will come about due to the ACA and all of its repercussions,” said Joel Ohman, a certified financial planner with 360 Quote in Tampa, Fla. “In the near-to-medium term, that uncertainty will continue. But long-term, those bullish on large company health insurance stocks may find their foresight rewarded as the under-65 market begins to slowly mimic the over-65 (Medicare) market in certain key ways,” he said.

Health insurance companies that are tied closely to government-managed health insurance plans like Medicare should fare well going forward.

Smart health insurance companies are focusing their efforts on Medicare and the over-65 (for now) market,” Ohman said. “Ten thousand new people are becoming eligible for Medicare every day, and that number will only increase as the population ages, and as proposals like "Medicare for All" increasingly become an option that is on the table.”

Experts also advise looking at health insurance companies that sell short-term policies (UnitedHealth and Health Insurance Innovations [HIIQ] are at the top of that list.) In rolling out the new changes, Trump widened the lane consumers can use to tap into short-term (often called “catastrophic” plans), which should trigger an upsurge in short-term plans.

Clearly, Trump has laid a major blow to his predecessor’s landmark legacy achievement, the Affordable Care Act. There’s not much former President Barack Obama can do about that, but investors can leverage the news to make some smart health investment decisions of their own.

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected].

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