Health insurers rake in profits, then raise rates
Dear Mr. Berko:
What do you think of health insurance stocks? Would you be a buyer of these stocks now? And if so, which health insurer would you select? I would also like your opinion on Community Health Services. My mother had some serious surgery at a neat, small, 125-bed hospital in Plaquemine, La. It’s a nicely run hospital and I found out it’s owned by Community Health, as are about 50 other small, neat hospitals like this one in small towns across the country.
H.O., Springfield, Ill.
Dear H.O.:
The most powerful people in corporate America are health insurance company executives, human beings who have the charm, charisma and empathy of a nest of cobras. The health insurance industry and its bosses, who earn mega-millions of dollars a year from our huge annual premiums, hold lives in their hands like the Roman emperors did 2,000 years ago.
Companies such as Blue Cross, United, Kaiser, Humana and Aetna hire fiendish functionaries to make life-and-death decisions for your family. If you’re ill, a Blue Cross functionary tells the doctor what procedure to perform, how long you are to remain in the hospital, the medications he can prescribe and the effectiveness of your postoperative care. Yes, the health insurance industry is Big Brother, run with great efficiency. Carriers raise rates and raise rates and raise rates, and as with the weather, everyone complains, but no one has the courage to do a thing about it.
This year, Humana plans the highest rate increase of 23.5 percent; Kaiser Permanente will have the smallest increase at 10.4 percent. All the others — Aetna, Wellpoint, Universal, Community Health, Pacific Health, Cigna, etc. — will increase rates by between 11 percent and 20 percent.
If this rate increase applied to auto insurance, homeowners insurance, telephone or power bills, state regulatory commissions would be climbing all over Allstate, Nationwide, your phone company or the power provider with bravado. But there’s never a peep from your legislature when Big Brother raises its rates. Don’t you ever wonder why?
Health insurance companies are quintessential moneymakers, with huge profits that are impervious to inflation, recession and the economic cycle. As the population increases, as people live longer and as new medicines and procedures are introduced, the health insurance industry will prosper beyond most things one can imagine.
I think Aetna Inc. (AET-$80.97), with 14 million medical members, 12 million dental members and 8.5 million pharmacy members, is on the cusp of an earnings surge. AET earned $3.85 last year, expects to earn $4.60 this year and $5.65 in 2006 and trades at a low 14 times 2006 earnings. AET’s operating margins are expanding, its membership rolls are growing and its high administrative expenses are improving quite nicely. Thomson Financial and Standard & Poor’s have a “strong buy” on the stock, Morningstar reckons it could trade at $135 in the next few years and of the 16 Wall Street firms following AET, 14 of them have a “buy” rating on it. That’s good enough for me. I’m required to tell you that some of our managed accounts own shares of the company.
Community Health Systems Inc. (CYH-$38.55) went public at $13 in June 2000, and investors’ silly enthusiasm quickly ran the stock up to $37. This unique company provides health-care services via ownership of 71 non-urban hospitals in small cities like Payson, Ariz., Lake Wales, Fla., Moberly, Mo., and Deming, N.M. Revenues have tripled since going public to an expected $3.8 billion this year from $1.3 billion in 2003. Operating margins are a healthy 36 percent and net profit margins are an excellent 5.6 percent and might march to 6.5 percent in a few years. In that same time frame, per-share profits rose from 14 cents to an expected $1.95 this year, so the stock is trading at a reasonable 20 times earnings. CYH is a superbly managed company with outstanding cost controls and very compelling growth potential. This growth potential is especially attractive considering the fact that the number of elderly Americans is increasing at a torrid pace.
Morningstar believes earnings can double in the next five to six years and the stock in that time frame could trade in the $70s. Deutsche Securities, Ryan Beck, Lehman Bros. and Advest have a “buy” recommendation on this stock. Some of our managed accounts have positions in Community Health.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.
© Copley News Service