Market Overview

Potential Troubles Ahead for Healthcare Stocks



Potential Troubles Ahead for Healthcare Stocks

When looking at specific sectors, there are warning signals on the when for the healthcare sector.  Health insurance stocks could see medium term headwinds for a few different reasons, as the current market outlook does little to support the bullish viewpoint.  Flaws and inefficiencies in the health insurance space have become much more clear now that Obamacare has established itself.  If anything, this means that there are several sets of health insurance stocks that should be sold given their recent strength.

Market attention with any positive prospects for health insurance stocks has simply run too far, and there is little in the way of fundamental support that can justify the lofty stock levels we are currently seeing.  If the enactment of new policy makes it difficult for customers with with significant medical expenses to actually pay their bills, we will start to see an unsustainable scenario where earnings could suffer at a time when economic stimulus available in the economy starts to be reduced.  This means that the health insurance stocks are now in a vulnerable position and that it makes sense to sell these stocks while the conditions remain favorable.   

Increasing Customer Base

Last year, health insurance companies saw a massive increase in their customer numbers,” said Jim Holm of  “This clearly brightened the outlook for these companies, but whether or not these trends can continue still remains to be seen.”  Company enrollment numbers have seen large increases, to be sure.  But the benefits here might be limited over the long run if most of these new customers are elderly or sick with significant illnesses.  Recent legislation does include measure for insurers to limit many of their losses and avoid medical claims that are excessive.  These measures include the use of taxes that are collected from non-exchange insurance products.  But the efficacy of these structured measures is another factors that could create unwanted surprises for the health insurance companies farther down the road.

In any case, there are still many unknowns in the new system, and this creates a strong element of uncertainty with respect to the way the largest insurance companies are likely to perform later in 2014.  With market valuations at elevated levels, this creates a troublesome scenario that does not lend itself well to long term position investing.  

Annual fees for the health insurance companies are expected to come in at $8 billion for 2014, and these elevated numbers could lead to some suggestions (both by congress and the health insurers themselves) that many of these measures should be repealed.  Even the mere suggestion of something like this could send markets (or, at least, stocks in the insurance sector) into a tailspin, and create a significant number of unnecessary losses for those investors that bought-in too late.  

From the tax changes alone, Healthcare rates are expected to increase by 2.3% in 2014.  This clearly is an unintended consequences of a program that was actually designed with the intention of lowering rates overall.   Add to this the fact that 2.1 million people bought private insurance coverage through the exchanges, with little ability to forecast the demographics of those that enrolled, the true number of cancellations, or the inability for many to complete the payment for their first month’s premium.  

This ultimately means that there is no real way of knowing if these customers are truly going to be able to afford the plans they chose.  For investors, there is simply too much uncertainty involved at this stage, and there is little reason to invest in large stakes in insurance companies in the current environment.  If anything, the reverse is true and the sector is much better geared toward sell positions that assume prices will be dropping into the end of next year.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Markets Trading Ideas


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