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Medicare Part D: Plan for Profits

02/24/2006 12:00 am EST


Neil George

Editor, Profitable Investing

"The new Medicare drug plan has been a headache for most folks," notes Neil George in Personal Finance. "But that’s not the case for investors who have the right prescription for profits." Here he looks at a trio of stocks poised to benefit from the new Medicare plan.

"Providing managed healthcare has been a great business during the last few years. The new Medicare plan is only going to complement what these companies have going on. The key to the industry is numbers. The greater the number of participants, the better their margins and the lower the risk of surprise benefit payouts. This has been leading to mergers and acquisitions as companies try to pull together the greatest sum of customers, including traditional non-Medicare and Medicaid participants from employee health insurance plans.

"The Medicare plan adds to this. Everyone who is eligible for the new plan chooses a provider. If folks who are at or below certain income levels and are already eligible for drug benefits under the old Medicaid and Medicare programs don’t choose, Uncle Sam will enroll them in a program. The bigger the company, the more beneficiaries are assigned to it. This will only bolster the consolidation of insurers.

"The leader of the pack is UnitedHealth (UNH NYSE). It grabbed PacifiCare, which was set to receive a large number of the assigned plan participants. Now those will flow to UnitedHealth. And all those AARP members are signing up with UnitedHealth through its Ovations unit. The books are still being put together; but even before the deal, United Health’s organic growth keeps climbing with revenues expanding at an average 20%-plus. Operating margins are already fat and expanding at near 40%, and they’ll soar in the coming year as the drug plan unfolds. Make UnitedHealth your first buy in this market.

"WellPoint (WLP NYSE) is putting its Blue Cross/Blue Shield businesses through the paces after grabbing Anthem. Like UnitedHealth’s PacifiCare, WellPoint’s Anthem has a lot of experience running drug plans for government programs (from state and local to federal levels). It hasn’t been without some teething pains. Some of the integration has weighed on costs and recent performance. And some farsighted shareholders have begun to cash in of late. Even with the past year’s stock bounce, WellPoint remains cheaper than United Health and should at least match similar valuations. After grabbing a few shares of UnitedHealth, buy WellPoint.

"Humana (HUM NYSE), like UnitedHealth and WellPoint, has lots of experience working with Medicare/Medicaid programs. This has led to some great cash flows and challenges. Beyond the drug plans, Humana has its regular treatment programs under the Medicare/Medicaid payment umbrella. With several cutbacks and limitations on how much Uncle Sam and states will pay for various treatments, Humana has always had to keep a tight lid on costs. That’s led to a few stumbling blocks along the way. But its stock is cheap, trading at a discount to rising revenues. Humana is worth your attention after you've bought our first two picks."

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