Understanding Managed Care Organizations (MCOs)
Managed Care Organizations (MCOs) play a significant role in the American healthcare system. They are responsible for providing health insurance coverage to a large segment of the population. The major players in this space include names like Humana, Centene, CVS, Elevance, UnitedHealth, and Cigna, covering over half of the US population.
Investment Opportunities Amid Regulatory Risks
As we approach the election, MCOs face regulatory challenges due to US healthcare spending that could impact their profitability. However, these challenges also present new investment opportunities. Investors have reasons to remain cautiously optimistic as these regulatory risks seem manageable in the short term. For example, current issues within Medicare Advantage, Medicaid, and pharmacy benefit management are spurring opportunities for long-term investors.
Main Headwinds for MCOs
Despite the challenges, MCOs are likely to expand their coverage. Here are four main headwinds they face:
Medicaid Eligibility Redeterminations: These are affecting the population size and causing mismatches in rates and acuity. This issue is expected to ease by the end of 2024.
Medicare Advantage Plan Growth: Growth may be constrained through 2026 due to regulatory actions, but it's expected to outpace other plan types due to demographic trends and increasing popularity.
Pharmacy Benefit Managers (PBMs): Facing scrutiny over transparency. Even with pricing changes, PBMs are expected to adapt by switching to fee-based arrangements.
- Election Cycles: These create volatility in MCO shares. If federal government control remains mixed, MCOs are expected to operate in a stable policy environment near-term.
Long-Term Policy Risks and Narrow Moats
While some MCOs have stronger positions than others, no company is completely shielded from policy risks. Despite generating economic profits, regulatory pressures could affect their long-term profitability.
Among the MCOs, Humana is noted as a strong prospect despite uncertainties in the Medicare Advantage market. Centene appears undervalued, whereas CVS faces challenges in Medicare Advantage and PBM transparency. Cigna, Elevance, and UnitedHealth are considered fairly valued.
Stock Market Sentiment and Healthcare Policy
Historically, MCO stock performance has been influenced by US healthcare policies, especially during election years. From 2008 to August 2024, MCO shares returned 11% annually on average, despite volatility during election cycles.
The healthcare system's future largely depends on political control. Although risks for MCO profits could increase if one party gains control in the 2024 election, a mixed government is likely to result in a stable policy environment. Both Republicans and Democrats agree on the need for increased PBM transparency, posing a minor profit risk to the industry.
Understanding these dynamics is crucial for investors looking to navigate the complex landscape of managed care organizations.
