Dear Mr. Berko:

I know you have a low opinion of health insurance companies and now I do, too, because my premiums have almost doubled in the past three years. Though my wife and I seldom use a doctor, my insurer continues to raise my rates and there’s no way to stop it. So I figure that the health insurers have got to be good stocks to own, because they provide a necessary service, and they can charge any premium they want. I also figure if I can’t beat the (blankety-blank) companies, I might as well join them. Their business is here forever, and they control both sides of the market: the consumer and the supplier. So please put aside your prejudices and tell me which two health insurers you like the best for a three- to five-year time frame.

B.E., Waukegan, Ill.

Dear B.E.:

I have a deep, visceral loathing for most health insurance companies. I abhor their bean-counter decisions to deny medical procedures considered necessary by the patient’s physician. I despise their practice of “medicating down” by challenging a physician’s prescribed medication and forcing the patient to accept a less-effective but cheaper drug. I’m saddened by “down-coding” (the doctor closes a wound with three stitches, but the insurer changes the code to a Band-Aid), which reimburses the physician at a lower pay level.

I’m furious that health insurers won’t pay physicians and hospitals in a timely manner, often forcing them to borrow money to pay employees and current expenses. It’s standard practice for most health insurers to pay the doctors and hospitals four to seven months after a patient’s bill has been submitted.

I despise health insurers for their strong-arm tactics that encourage physicians and hospitals to provide second-class medical care. And I hold the health industry in shame, disdain and sneering scorn, because it is this industry that is primarily responsible for the extraordinarily high cost of health care.

However, I’m mindful that during the past half-dozen years, companies like Aetna, HCA, Humana, Lincare, Pacificare, etc., have continued to outperform the market. I’m mindful that the health insurance industry, literally and figuratively, controls the health and welfare decisions of almost every American. I’m mindful that the industry may soon have more influence on our lives than the federal government.

And I’m mindful that the health-care industry’s control over Americans might make it increasingly apparent that George Orwell’s “1984” and Big Brother are almost here. So, considering the czar-like control this industry has over our health care and its power over premium payments, it is evidently conclusive that health insurance stocks might be outstanding investment opportunities.

My two favorites are Aetna Inc. (AET-$89.94) and UnitedHealth Group Inc. (UNH-$60.94). AET was so poorly managed in the past that it still has enormous potential for improvement. Net profit margins have tripled in the past four years to 6.3 percent, membership is growing soundly, return on equity has more than doubled to 12 percent and the company is just beginning to feel its oats.

Earnings this year are expected to come in at $4.65 a share, and four years hence the Street expects AET to earn close to $8. Figuring an average price-to-earnings ratio of 22, it’s not unreasonable to assume that AET could trade between $170 to $185 a share.

UnitedHealth just can’t do anything wrong. This is a superbly managed company. Per-share earnings and revenues have increased in 19 of the past 20 years, and the company enjoys a solid 7.3 percent net profit margin. UNH has over 55 million policyholders, using 460,000 physicians who are affiliated with 4,650 hospitals. Since 2000, UNH shareholders have enjoyed three 2-for-1 splits, and the value of their shares has increased more than 11-fold from $5.50 a share to today’s $63 a share.

UNH has grown by aggressively seeking new business and via acquisitions. As soon as regulators approve its buyout of Pacific Health, UNH’s revenues will increase by $15 billion and net profits will grow by 15 percent. UNH expects to earn $2.55 a share this year, and (excluding future acquisitions) the Street believes earnings in 2009 could exceed $5 a share

This company is so well-run (imagine a health insurer with 35 percent return on equity) that there’s little room for organic improvement. So considering an average P/E of 23, UNH shares could trade between $110 and $120 in the next three years.

Two other health-care stocks you can put in your kit bag are Community Health Systems Inc. (CYH-$38.83) and Humana Inc. (HUM-$56.53). Both are highly regarded on the Street, both should experience sizable growth in revenues and earnings, and both have the potential to double their share prices in the next four to six years.

This industry is one of the few that are very nearly impervious to recession, inflation and the business cycle. At least for the next three to six years, I believe that health insurance stocks will outperform the market.

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