Obamacare: An Incentive to Invest in United Health Group

Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Affordable Care Act (aka “Obamacare”) is slated to kick in next year and businesses must decide now how to manage rising health care costs.

The Act has many requirements and tax implications that are too numerous to mention here. The bottom line: companies that employ 50 people or more will be required to offer health care coverage or risk a penalty to be enforced by the IRS. This means decision makers need to choose whether to pay the tax penalty or finance health care premiums.

If business leaders choose not to provide coverage, employees will be forced to buy their own insurance. Failing to do so will also cost a tax penalty unless they decide to buy into Obamacare through one of the so-called health care exchanges.

So, companies will see their health care expenses continue to rise. The other option is cutting costs through a reductions in force. But trying to skate around the mandate to provide insurance by hiring part time workers will not work; the law requires employees who work at least 30 hours per week to be covered.

Ultimately, Obamacare fails to remedy the ills of rising health insurance and healthcare costs. Meanwhile, in addition to taxes and penalties, the new entitlement program will be financed by more than $700 billion in cuts from Medicare over a ten year period. This means that retirees will need to buy additional supplemental insurance through one of the health care companies.

And this could be a reason to invest in the health services sector.

Last year the sector performed well. In fact, health care has been one of the few industries that did so during the economic downturn. Currently, given the lingering uncertainly and mine fields in the broader markets, despite signals that a housing market and manufacturing recovery is underway, health services should continue to perform well in 2013.

One of the leaders here is United Health Group (NYSE: UNH).

In sum, United Health Group specializes in health care management services. This includes secured management plans for self-insured employers, risk-based health care coverage, as well as data consultancy services. Most of all UNH is an industry leader in offering Medicare supplements and other retirement benefits. This includes prescription coverage to fill the so-called doughnut hole in Medicare plans. And these factors could make the company a good play in 2013.

The big question and unknown risk is the extent to which health care exchanges being devised under Obamacare will affect UNH’s market share. Pricing disadvantages could force the provider to withdraw from certain markets. However, health care exchanges, which will begin enrolling members in September 2013, could also be a new opportunity for managed care companies according to some analysts.

United has factored this into their forward looking forecasts and intends to participate in the new exchanges. In short, opportunities like health care exchanges and the company's recent investment in Amil, the Brazilian health care leader, should make 2013 a profitable year for United Health Care and a better bet than competitors like Cigna (NYSE: CI) and Aetna (NYSE: AET).

Some analysts believe that Cigna is an attractive investment because of its strong revenue growth that is higher than the industry average. This is due in part to its solid earnings and low debt levels. These factors have pushed the stock price up by about 28% in the last year. That said, Cigna’s weak cash flow is a yellow flag and whether or not the stock price will continue its impressive climb is uncertain.

As for Aetna, last December insiders sold about 180,000 shares and raked in about $8.5 million. At the time the firm’s Chief Executive said that the Affordable Care Act could trigger a spike in premiums to about twice their current levels. And this will obviously prompt companies to replace Aetna with other health insurance outfits while shifting premium costs to and increasing co-pays for employees.

In the final analysis, United has enjoyed more than 35 years of continued growth and it now has more than 83 million subscribers. UNH is clearly a dominant player in the managed health care industry with a market cap of about $54 billion, and this gives it a healthy cash flow. Because of this UNH could be well positioned to advance its market share over these competitors.

kcolona has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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