Analysts from major financial institutions are cautiously
optimistic about the value of managed care organization stocks during 2020,
citing a more stable regulatory environment and rising revenues across the
industry.
Over 2018 and 2019, markets were skeptical of MCOs' value due to
regulatory turbulence in the form of attempts to roll back the Affordable Care
Act, according to a Jefferies report by analysts David Windley and David
Styblo.
In particular, they cite the Texas
v. United States court case, in which Republican attorneys general
challenged the ACA's constitutionality based on the elimination of the
individual mandate's tax penalty. In December 2018, U.S. District Court Judge
Reed O'Connor ruled in favor of the plaintiffs, causing MCO stocks to drop. A
subsequent appeals court ruling kicked most of the case back to O’Connor, which
caused MCO stocks to rally but could prolong the litigation unless the Supreme
Court agrees to take up the case.
But even before that ruling, MCO stocks had gained value in the
latter half of 2019. The Jefferies report cites setbacks in ACA repeal efforts
and strong third-quarter earnings, particularly from UnitedHealth Group, as
reasons why MCO stocks have, in the report's words, "outperformed the
market by 20+ points."
Still, analysts have some misgivings about the recent rally.
Citi analyst Ralph Giacobbe suggests that the late 2019 correction might have
pushed valuations too high. Despite his skepticism, Giacobbe does expect MCO
revenues to continue to rise in the coming year.
So does a more optimistic Credit Suisse report by A.J. Rice,
though it predicts that "most MCOs anticipate a stable to modest pickup in
medical costs for 2020."
Both the Credit Suisse and Citi reports anticipate stability, if
not growth, in enrollment, citing growth in Medicare Advantage markets across
the country.
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