A. Manage care indusry did very poorly in last one year, specially YTD. There are couple of reasons.
1. Regulatory or political issue.
The trump adminsitration cut ACA subside, Medicaid.
2. The MLR rate keep raising--M-dicare-L-oss-R-atio==MLR
The combined factors push down health insurance companies earning, and their stock price witnessed steep declining.
However, given the sudden and sharp sell off, one could judge that the the political risk is mostly priced in.
B. Let look at manage cares industrial long term dynamic.
1. Their TAM is growing steadily, driven by population growth and the populating aging. Their population is growly every year because of the demographic growth and change
2. Their TAM is also drivn by the premium growth drivin by raising MLR.
3. If you put population growth and premium growth, the slope of the steady growth of the $ size TAM is not only positive but also can extend into far far future. This is their growth curve.
Normally, the steady growth industry and companies command premium multipel.
That is the past, now their multple is much lower than their long term average
However， their grow prospective does not really deteriorated over long term.
C. Now let's discuss their pricing power--you will find out that they have some pricing power, and which is empowerd by the ACA law.
There is 80 to 20 rule dedicating their business, which mean 80% of the premium has to be spend
on healthcare claim and quality improvement activities; and only 20% of premium can be spend on administrative, marketing, and profit. If they spend less than 80% of premium on healthcare claim and quality improvement, they have to reimburse their customers.
However, if they spend more than 80% on those, they can apply for charging higher premium in next underwriting cycle--starting Jan.1, 2026.
See, they have some sort of pricing power, or their profit is guarranted.
In earnings report UNH said they spend more than 80% .
For UNH and his peer, they already submited application for higher premium. That is why UNH said they are going to return to profit growth next year.
They can achieve it, unless they screw it up by doing some stupid things.
In short, it is a steady growth industry and profit is almost guaranted.
D. UNH is a leader and more diversified, CNC and MOH are more focused on ACC and medicaid, ELV and HUM are more focused on medical Advantage, which are deemed to better business .
This is not a trade recommendation, and I bought most of the stocks named here in last week or two.
