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Why are health insurers doing so well in COVID situation


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Short version:



Longer version (i have a very thick file on them):

If you can live with the following risks, health insurers are looking good:

-nationalization risk

-regulatory risk

-declining market risk

Risks above would mean lower multiples and lower realized value. The regulatory risk is related to the eventual decrease on rate of return allowed. i think JRM has described this for utilities in general as allowed returns have remained high despite risk-free rates going down. It's bizarre because regulated entities, in that context, benefit from relatively high returns and simultaneous high valuations when trading (interest rate gravity rule). Is there some kind of free lunch or is reversion to the mean lurking? The declining market risk is related to the potential migration of people from employers-sponsored health insurance to Medicare and Medicaid. This may hurt some insurers but others (Centene) may benefit.


Forgetting the above risks, health insurers are looking good because COVID-19 costs will be more than mitigated by lower costs elsewhere and insurers can always adjust premiums with rising costs if they occur. Health insurers have done well adjusting this way and more uncertainty about costs mean more potential profits that includes some forms of regulatory capture.


Personal anecdote-type of data which is relevant to the US even my area has socialized medicine: In my area (especially true for large and urban centers), emergency rooms are set up to operate at about 100% capacity at all times which means, in practice, that emergency rooms typically operate at 120% of capacity. With the COVID-19 outbreak, for many weeks up to about just now, despite higher activity for COVID-19 related care, emergency rooms have been operating at about 80% capacity (!). As the previous poster has mentioned, elective procedures supply has gone down very significantly and will only slowly pick up. From a financial perspective, this is very good for health insurers. An argument could be made that there is pent-up demand but this is only partially true as a lot of care has simply been and likely will continue to be forgone.


Fwiw, 10 years ago, i considered putting a % of funds into a basket of stocks (United Health, Anthem, Humana, Cigna, Centene and others) and decided not to because of the above risks that i thought could play out over the next twenty years. So far, i've been wrong and the basket of stocks would have provided Buffett-early-years returns (basket has multiplied by 12, add low dividend % and has rebounded nicely by about 50% {typical recession-resistant stocks} after the recent scare).


We all have to take our individual decisions but i just want to add that the recent COVID-19 episode has shone a light on the comparative disadvantages of the US healthcare system (difficulty with coordination of policy, human and physical resources) that health insurers thrive on.


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