Health insurance and the government

Dear Mr. Berko: In one of your columns, you recommended several health insurance stocks as good investments. You stated that health stocks would make record profits because of greatly expanded government health care and that growing revenues, earnings and dividends would push those stocks higher. So I bought Humana at $152 and Aetna at $91 in January. Now the government has said it is reducing payments to Humana and Aetna. Do these companies still have "above-average growth potential," or should I sell both and lock in my gain? If I were to keep just one stock, which one should I keep?

- SS, Jonesboro, Ark.

Dear SS: You're thinking like all those yahoos who have a soda straw view of the stock market.

The Centers for Medicare & Medicaid Services (until recently, the agency was called the Health Care Financing Administration) is considering a modest decline in payments to insurers that provide Medicare Advantage plans for the public. These MAPs are health plans offered by private insurance companies that contract with Medicare to provide seniors with all of their Part A and Part B benefits. MAPs include HMOs, PPOs, Private Fee-for-Service plans, Special Needs plans and Medical Savings Account plans. (Did you know that some insurers intend to offer MAPs for household pets when Congress eventually approves legislation?) MAPs have more bells, whistles and freebies (prescription drugs, eyeglasses, dental care, health club memberships, hearing aids, etc.) than the government-run plan. However, you can only use the docs approved by the MAP insurer, and some of those docs have trouble speaking English. Meanwhile, the government pays MAP insurers more per month than it deducts from the Social Security checks of Medicare participants.

Aetna's (AET-$109.50) CEO, Mark Bertolini, expects Washington to reduce funding to his company by 1 percent in 2016, while Humana's (HUM-$170) CEO, Bruce Broussard, expects Medicare Advantage funding to decline by 1.5 percent next year. Frankly, those cuts will have about as much impact on the earnings of AET and HUM as would the advent of another fly to a slaughterhouse. Be mindful that the prime directive of AET and HUM is to make billions of dollars for their shareholders by ruthlessly slashing costs and denying claims so that earnings and dividends improve every year. So Mark and Bruce will do everything within their power to keep shareholders happy, including raising copays, reducing drug benefits, denying medical/surgical procedures, restricting visits to specialists, increasing physicians' patient loads, employing unacceptable doctors in your network, and on and on until the squeezing becomes unmerciful. And the feathers will really hit the fan if you need to talk to a real person at AET or HUM. Personnel lost through attrition will not be replaced, so policyholders will have long waits just to talk to a machine directing them to press series of numbers, which are often wrong. By comparison, the IRS, the Department of Motor Vehicles and the Postal Service are caring angels.

This year, AET expects $62 billion in revenues, which should produce record profits of $7.15 a share and a $1 dividend, up strongly from 2014. Wall Street's longer-term consensus suggests that by 2018, AET could generate $77 billion in revenues, possibly producing earnings in excess of $10 a share and a dividend of $1.65. And if those projections are good, then AET's share price is expected to reach between $170 and $180.

HUM may do even better. The Street believes that HUM will report 2015 revenues of $54 billion, which should produce record earnings of $8.75 a share and a dividend of $1.26. And analysts' projections going out to 2018 suggest revenues of $68 billion, which could produce earnings of $14.10 a share and a $2 dividend. If HUM comes close to those numbers, the shares could trade between $190 and $200.

Both insurers are run by ruthless people in management who know what they must do to keep their respective companies humming with profits and their shareholders happy. However, if you don't have the confidence to keep both issues, I'd keep AET. Aetna's Bertolini owns 550,000 shares, whereas Broussard owns only 60,000 shares of HUM.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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Published: Tue, May 19, 2015