3 Companies to Watch As Obamacare Stumbles Forward
Like a toddler, Obamacare is three years old but only just getting started. And also like a toddler, it appears likely to cause something of a mess. That looks to be particularly true with the health insurance exchanges slated to launch in October of this year. More than half of the states -- 26 in total -- opted to pass on creating a state-run health insurance exchange. Another seven states elected to go with a hybrid federal-state operation, leaving only 17 states plus the District of Columbia choosing to launch their own exchanges.
Despite the messy beginning, these health insurance exchanges could radically change the health care landscape in the U.S. in the coming years. Here are three companies to closely watch as Obamacare stumbles forward.
1. Selling shovels
As in the days of the gold rush, sometimes it pays more to sell shovels than actually mine the gold. That could be the case with CGI Group . Perhaps no other company is as entrenched in providing the capabilities needed for health insurance exchange as this Canadian information technology firm.
Large consulting firm Accenture landed the contract with the state of California last July to build one of the largest exchanges. Accenture's bid included sub-contracting part of the work to none other than CGI Group. That's not surprising. CGI is also involved in helping build state-run exchanges in Colorado, Hawaii, Massachusetts, and Vermont. And remember the large number of states that decided to simply let the feds get the enjoyment of creating health exchanges? CGI is helping develop those platforms, too.
CGI's current valuation with a price-to-earnings multiple of nearly 160 looks ridiculously high -- until you consider the future earnings expected for the company. When growth estimates are factored in, CGI's forward price-to-earnings multiple stands below 11. That's relatively cheap when we look at the company's historical valuation.
2. Playing both sides
One company is playing both sides of the fence when it comes to health insurance exchanges. UnitedHealth Group will sell health insurance through the exchanges -- and help build the federally-operated exchange also. UnitedHealth's Optum business unit bought Quality Software Services Inc., or QSSI, in September. The U.S. Department of Health and Human Services awarded a contract for helping build the federal health insurance exchange to QSSI and others, including the aforementioned CGI Group, at the beginning of 2012.
Optum's purchase of QSSI raised eyebrows on Capitol Hill. In December, leaders of the Senate Judiciary Committee and the House Energy and Commerce Committee sent a letter to the chairman of QSSI asking pointed questions about the potential of a conflict of interest. Optum executive Andy Slavitt stated that UnitedHealth and Optum are "separately reported financially and separately managed," noting that Optum's clients include several UnitedHealth competitors.
Even without the QSSI purchase and its associated controversy, UnitedHealth remains a company to watch as health insurance exchanges are implemented. My interest really isn't related so much to the financial impact on UnitedHealth, though. Only 10% or so of the company's earnings stem from the customer base qualified to participate in the exchanges. Instead, I view UnitedHealth's experience in the health insurance exchanges as a barometer for how successful the exchanges will be.
Comments from the company's CEO, Stephen Hemsley, earlier this year indicated that UnitedHealth will take a cautious approach. Hemsley said that the insurer will likely only participate in 10 to 25 markets initially. That stance is in line with other major players in the industry, such as Wellpoint , which announced plans to participate in 14 state exchanges.
3. Winning by association
Express Scripts won't be involved with helping build health insurance exchanges and won't directly participate in any of the exchanges. However, the company stands a decent chance of winning by association if the exchanges do well.
If insurance companies like Wellpoint, Express Scripts' largest customer, do end up selling billions of dollars worth of policies as projected, PBMs will benefit also. As the nation's largest pharmacy benefits manager, or PBM, with more than 40% of total market share, Express Scripts appears likely to get its fair share of the increased business.
What if health insurance exchanges flop? Controlling drug costs will still be essential, so PBMs should fare well regardless. The federal government predicts that annual spending on prescription drugs will grow 75% by 2021. Services offered by PBMs look to be in demand even if health insurance exchanges aren't. With its operational scale and sophisticated analysis tools, Express Scripts should win either way.
Obamacare's health insurance exchanges have already gotten off to a stumbling start with so many states taking a pass. A lot could go wrong along the way. Then again, it's quite possible that the concept will ultimately take off and flourish. Three-year-old toddlers can be entertaining to watch. Of course, that entertainment is much more enjoyable when those toddlers can't break anything that belongs to you.
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The article 3 Companies to Watch As Obamacare Stumbles Forward originally appeared on Fool.com.Fool contributor Keith Speights has no position in any stocks mentioned. The Motley Fool recommends Accenture, Express Scripts, UnitedHealth Group, and WellPoint. The Motley Fool owns shares of Express Scripts and WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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