Over at the Business Word Don Johnson notes that the healt plan sector took a nosedive even though United came out with pretty good numbers and forecasts for better numbers to come. Don and I have both been somewhat bearish on the health insurance sector, it looks like short-selling shills The Street.com are joining us, and I’ll give you three reasons why:
1) United says that medical trend is slowing. “Medical claims during the quarter were $90 million lower than the company had expected, bolstering the bottom line.” Short-term this is good news for the health plans, but over time they usually manage to pass on these costs to their customers. And their best years ever (in the last few) have been when premiums have been going up the fastest. It’s when they are in a price war over premiums that they suffer.
2) Health plans are increasing premiums in a market when employment isn’t growing much, and when more employees and consumers are being made “responsible” for more of the premium. So eventually there’ll be a price effect and fewer people will be signing up, and they’ll be signing up for lower premium plans. Ergo there’ll be relatively less revenue in the future.
3) They have failed in their overall mission to control health care costs, so they don’t deserve to have stock that goes up like a helium balloon. (OK this one is purely emotional on my part!)
However, I have been bearish on health plans since December 2004 and Don has since spring 2003! Looking at this chart of United, you might be wise to not trust our judgement implicitly and do your own DD!