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Best Health Insurance Stocks to Buy in 2020

Investing in a company that offers products and services that people should have can be a smart strategy. Like it or not, health insurance is a necessity for Americans today.

What are the most important health insurance actions to consider? What do you need to know to start investing in health insurance stocks? As the major health insurers would say: we've got you covered.

Top health insurance stocks for 2020

  1. UnitedHealth Group (NYSE: UN): UnitedHealthGroup ranks as the world's largest health insurance company by far. Its UnitedHealthcare unit offers health plans for employers and individuals and is also a major player in the markets for Medicare Advantage and supplemental plans for Medicare and Medicaid. The company's Optum business segment provides health information and services that support technology, including OptumRx Pharmaceutical Benefit Management (PBM) services. While UnitedHealthcare generates more than three-quarters of the company's total revenue, Optum is the primary driver of UnitedHealth Group's growth.
  2. Anthem (NYSE: ANTM): Although Anthem is less than a third the size of UnitedHealth Group by market value, it is still one of the largest health insurers. Anthem operates Blue Cross and / or Blue Shield plans in 14 states, but is licensed to sell health insurance throughout the United States. It competes in the same fields as UnitedHealth Group, including individual and employer plans, Medicare Advantage, Medicare supplements, and Medicaid. Anthem also operates a PBM, IngenioRx, which contributes about 18% of the company's total revenue.
  3. CVS Health (NYSE: CVS): You might think of CVS as a pharmacy retailer (which it is). However, the company also operates one of the largest PBMs in the country, CVS Caremark. Thanks to the acquisition of Aetna in 2018, CVS Health is also a leading health insurance company. The company's health benefits segment, consisting primarily of Aetna, generates nearly 28% of CVS's total revenue. While the top three health insurance stocks pay dividends, CVS Health offers the most attractive dividend yield in the group.

One way to group the stocks of all the major health insurance stocks, plus another, is to buy an exchange-traded fund (ETF). While there's no such thing as an ETF focused solely on health insurers, the iShares US Healthcare Providers ETF (NYSEMKT: IHF) is getting closer.

The European Training Foundation (ETF) tracks the performance of the US Dow Jones Index specifically for healthcare providers, which includes US companies that provide health insurance, specialty diagnostics and treatment. UnitedHealth Group, CVS Health and Anthem are the three largest holdings of the iShares US Healthcare Providers ETF, which also hold significant positions in other leading health insurers including Centene (NYSE: CNC), Cigna (NYSE: CI) and Humana (NYSE ). : HUM).

What to look for in health insurance stocks

There are a few things, like revenue and profit growth, that you need to consider regardless of what type of inventory you have in mind. However, there are a few specific factors to consider when considering health insurance stocks:

  • Revenue mix: Check where health insurance companies generate the most of their income. Some, for example, can make more money with Medicare Advantage, while others focus more on Medicaid or commercial markets. Understanding the company's revenue mix will give you a better idea of ​​growth prospects and risks.
  • Medicare Ratio (MCR): This ratio (sometimes called the benefit expense ratio, medical cost ratio, medical loss ratio, or medical interest rate) measures medical costs as a percentage of premium income. The higher the MCR, the less profit the health insurance company will make.
  • Diversification outside of health insurance: It is increasingly common for health insurance companies to branch out into other businesses (or other companies to branch out into health insurance). Pay close attention to other areas of focus for health insurers, as they can greatly influence companies' prospects and potential growth risks.

Risk Health insurance stock 

Like all companies, health insurance companies face risks, including the potential for an economic downturn and increased competition. However, health insurance stocks also have some unique risks, including:

  • Regulatory changes: The health insurance industry is highly regulated at the federal and state levels. The potential for major regulatory changes to cause challenges for health insurance companies is an ongoing risk. For example, if the United States implements a single-payer health plan in the future, health insurers are likely to see many of their business opportunities evaporate. On the other hand, some important reforms present opportunities for health insurance companies. The Affordable Care Act (known as Obamacare) expanded Medicaid programs, increasing the growth prospects for health insurers in this market.
  • Reimbursement pressures: Even without major regulatory changes, health insurers constantly face the possibility that reimbursement pressures hurt their bottom line. Businesses must get premium approval from government regulators, who may be reluctant to charge higher costs to residents of their states. The Medicare and Medicaid programs also set fees that can hurt the results of health insurance companies.
  • Unexpected Medical Costs: Health insurance companies set their premium rates based on expected medical costs. However, there is always the possibility that these medical costs are much higher than expected. For example, the COVID-19 pandemic initially caused great uncertainty for major health insurance companies and may have led to an increase in medical costs. Instead, the pandemic delayed non-emergency medical services, making medical costs for health insurers temporarily lower than originally expected.