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HMO's -value trap? or opportunity


biaggio
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What does the board think of article in Forbes: The Horrendous Truth About Health Care Reform...."You were right if you thought the insurance companies would emerge unscathed from what the government wants to call reform..."

 

http://www.forbes.com/2009/12/04/cigna-unitedhealth-aetna-personal-finance-investing-ideas-humana-wellpoint.html?partner=yahootix

 

Have not seen much of any investment recommendations for this sector, which makes me curious. Contrarian play?

 

Full disclosure: own some UNH.

 

 

 

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Bruce Berkowitz investment thesis is that the government needs the HMO's to manage health care system,rather than re inventing a new system. As well the HMO's have not been overpaid to manage, earning 4% profit. HMO's "have been doing their job" according to Bruce.

 

Assuming one is positive on investing in the HMO area, would one look at a discount of free cash flow model to value business?

 

The FCF($4.66/share on trailing 12 m) on UNH , out of proportion to share price($27.46).

see: http://www.gurufocus.com/financials.php?symbol=UNH

 

Would appreciate any insight?

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According to Bill Moyer video noted above:

 

“healthcare industry has 6 lobbyist for each member of congress...more than 500 of them are former congressional staff members...$380 million spent lobbying, advertising and campaign contributions in the last few months, $1.5 million went to Max Baucus, finance committee chairman...$49.7 million paid to current senate finance members over the last 2 decades”

 

I find this unbelievable.

 

HMO's have more than a network effect than I thought.

 

Thanks again Valuegeek.

 

 

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  • 3 years later...

http://www.ft.com/cms/s/0/1b0f01b2-60c9-11e2-a31a-00144feab49a.html#ixzz2IHaJX9iI

 

UnitedHealth, the biggest US health insurer by revenues, said on Thursday that it expects to increase earnings next year in spite of changes associated with President Barack Obama’s healthcare law.

 

Health insurers have been anxious about the rollout of the law, which will be fully in place by 2014, due to increased taxes, uncertainty associated with state insurance exchanges and regulations on how sharply they can increase prices.

 

Stephen Hemsley, chief executive of UnitedHealth, said on a conference call with analysts that at this point there have been few problems associated with the law, which was passed in the face of fierce opposition in 2010, and that the new regulations might not be as bad as some have feared.

 

“There is certainly a great deal more to work through and significant unknowns but so far, it has been manageable,” Mr Hemsley said. “In the end, the ACA [Affordable Care Act] expands an enormous national healthcare market that will be served by the private sector.”

 

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http://www.ft.com/cms/s/0/1b0f01b2-60c9-11e2-a31a-00144feab49a.html#ixzz2IHaJX9iI

 

UnitedHealth, the biggest US health insurer by revenues, said on Thursday that it expects to increase earnings next year in spite of changes associated with President Barack Obama’s healthcare law.

 

Health insurers have been anxious about the rollout of the law, which will be fully in place by 2014, due to increased taxes, uncertainty associated with state insurance exchanges and regulations on how sharply they can increase prices.

 

Stephen Hemsley, chief executive of UnitedHealth, said on a conference call with analysts that at this point there have been few problems associated with the law, which was passed in the face of fierce opposition in 2010, and that the new regulations might not be as bad as some have feared.

 

“There is certainly a great deal more to work through and significant unknowns but so far, it has been manageable,” Mr Hemsley said. “In the end, the ACA [Affordable Care Act] expands an enormous national healthcare market that will be served by the private sector.”

Thanks for bringing UNH up.

UNH

-not very sexy or popular these days

-continued small progress every year

-have held and followed for 20 years- one of my first hole punches- not a lot put in as I did not have much 20 years ago.  Loaded up in 2008 downturn. 3rd largest holding next to FFH, ALS so I am very biased.

-I expect it to be able to continue growing top line say 7-8% driven by demographics and small gains in market share. Has emphasized that it will not write insurance that is not profitable. Its also buying back a lot of shares ($3b last year on EV ~ $50b). Seems like a decent value @ ~ 10 x earnings. Expect 10-15% per year return. Would buy more at <$47 per share.

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Interesting sector that I have some professional experience in. Insurers are great, they are unscathed from ObamaCare. Some are using it as an excuse to raise prices and re-jigger plans to be more profitable. There is a lot of waste at insurance companies, a lot of waste. So for investors this means a lot of fat could be cut if needed, I don't see significant losses in the future here.

 

The worrying trend is this, insurers buying hospital systems to control costs. This is big in my area but the result is profitable insurers buying unprofitable, or marginally profitable hospitals. The hospitals are a real millstone for some of these companies. Most hospital systems are run by doctors not business people, and there is a BIG difference.

 

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I was thinking Wellcare and Wellpoint, but the whole sector looks cheap.

 

I think there is value in WLP and AET. More work to be done tough, before i step in.

 

I've been tracking UNH ever since they made the Amil investment, but I wasn't sure how revenue growth would offset the medical loss ratio mandate (or whatever it's called) in the US.  Looks like it might not be so bad.

 

Still a lot of work to be done here, but these guys certainly look cheap on the surface.

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