Health Insurers Can Ride Out the Coronavirus, Amazon Storms

Considering what has failed to sink health-insurance stocks in 2020, the shareholder outlook for next year should be rosy.

In a year full of unpleasant surprises, insurers have managed to thrive. The Covid-19 pandemic resulted in a huge boost to short-term profitability in the spring as elective procedures, and thus many expensive insurance claims, ground to a halt.

That boost will reverse next year as patients catch up on deferred care. But the impact on earnings should still be manageable.
UnitedHealth Group,
the nation’s largest publicly traded insurer, said it expects a $1.80 hit to earnings per share from pandemic-related costs. That estimate includes factors directly related to care, such as a pickup in procedures and ongoing coronavirus testing and treatment costs. It also includes the impact of higher unemployment and other economic pressures.

But thanks to strong membership growth in markets such as Medicare Advantage, the insurer expects to earn $16.90 to $17.40 a share in 2021 according to generally accepted accounting principles, good for roughly 8% growth from a year earlier. That growth rate is arguably understated, since at least some Covid-related headwinds won’t likely recur. It shouldn’t be forgotten that UnitedHealth has earned a reputation for issuing conservative financial guidance that it can exceed.

Other risks unrelated to Covid-19 seem to have come and gone without much trouble. The 2010 Affordable Care Act, which has been a highly beneficial legal framework for the industry, looks likely to remain the law of the land. While the Supreme Court heard another challenge to the law last month and a ruling is pending, during oral arguments several conservative justices joined liberals in voicing skepticism that the entire law must fall.

Because of pandemic-related costs, including ongoing coronavirus testing and treatment, UnitedHealth said it expects a $1.80 hit to earnings per share in 2021.

Because of pandemic-related costs, including ongoing coronavirus testing and treatment, UnitedHealth said it expects a $1.80 hit to earnings per share in 2021.

Photo: Michael M. Santiago/Getty Images

Meanwhile, the final makeup of the Senate is still uncertain, but a “blue wave” that health-sector investors had feared didn’t materialize in November elections. Comprehensive reform is therefore unlikely soon, especially with the continuing focus on solving the pandemic. “The health industries and Hill have largely called truce while we are responding to Covid,” says

Barrett Thornhill,
partner at lobbying firm Forbes Tate.

Amazon’s
long-anticipated launch of its pharmacy business last month is certainly a threat to retail pharmacies over the long term. But a complete disruption of how prescription drugs are sold, which would theoretically hit profits at insurers and their pharmacy-benefit manager subsidiaries, seems far less likely. After all, Amazon has tapped Inside Rx, a subsidiary of
Cigna,
to manage the drug discount program for its Prime membership.

As has become standard in the raging bull market, investors are pricing rosy outcomes into insurance stocks. UnitedHealth trades for about 20 times the midpoint of next year’s earnings forecast. That is on the high side for insurers based on recent history. But in a market where a merely intriguing business plan can command a runaway valuation, paying a premium for a proven winner is hardly a crazy idea.

And even in a challenging year, shares have performed rather well. UnitedHealth has rallied 16% so far in 2020, and
Humana
is up about 11%. Don’t be surprised if next year brings even healthier results.

Write to Charley Grant at charles.grant@wsj.com