All year health insurance stocks have been under the weather, battling against uncertainties, but the long-term fundamentals should rejuvenate the well-being of insurers’ core business in due course. 

The bellwether of all the healthcare payers is UnitedHealth Group, which closed Friday at $506.10 per share, down by 2.42% this year. Elevance Health, formerly known as Anthem, is slightly down this year by 0.83% and closed at $447.10. And CVS Health shares flopped to $71.15, a 23.42% loss. 

By contrast, the S&P 500 year-to-date performance is up by 12.5%. 

The stocks of these three biggest market cap health payers have slumped this year due to the end of a Covid rule that allowed many people to remain on Medicaid and other federal insurance plans, and uncertainty around federal bonus payments that are paid to insurers. Yet, Wall Street is still bullish on the long-term prospects of health insurers because America’s elderly population is growing and living longer, which means more seniors will need federal-based health coverage and these companies should benefit from an aging nation.

The healthcare sector and insurance companies UnitedHealth, Elevance, and CVS have underperformed this year in comparison to the S&P 500 index.

“Short-term headwinds often lead to opportunities,” said Julie Utterback, an analyst for Morningstar. “What we’re seeing right now is an opportunity that the market is giving long-term investors to look at these names.” 

Utterback rates CVS and Elevance as undervalued, but isn’t as enthusiastic about UnitedHealth at its current stock price.

While millions of people could lose their Medicaid coverage due to a new federal law, the impact could be significant for all three insurers that provide Medicaid.

Elevance’s membership in Medicaid decreased by 135,000 in the second quarter of this year due to the new law. CVS and UnitedHealth have also seen declines in their Medicaid memberships in Q2.

The CEO of Elevance, Gail Boudreaux, told investors on the earnings call that it is too early to sound the alarm and he expects many of these consumers will come back. CVS and UnitedHealth also share similar sentiments as Boudreaux. Both companies are working with state officials to determine people’s eligibility.

Source: KFF

Federal bonus payments are an incentive for Medicare Advantage (MA) insurers to provide efficient and high-quality care to millions of seniors. MA insurers are expected to collect at least $12.8 billion from bonus payments in 2023, a nearly 30% increase from last year, according to KFF, a non-profit foundation that focuses on healthcare issues. Any changes to how much bonus payments health insurers collect could have a consequential impact.

“If those bonus payments affect the managed care players, then they might have to reduce the benefits that they offer to seniors,” said Utterback of Morningstar. “Which may decelerate the growth of that market.”

A recent report published by Urban Institute–a Washington D.C.-based think tank that focuses on economic and social policies–argues that the bonus payments program should be reformed because it does not translate into improved quality of care for patients and only inflates Medicare’s spending budget. 

Changes made to bonus payments could negatively impact health insurers’ business, but are highly unlikely to happen anytime soon, said Utterback.

Despite the transitory headwinds, higher medical utilization and growth in health benefits have boosted top insurance players’ quarterly earnings this year, exceeding Wall Street’s expectations and convincing investors to stick around for the long haul.

Part of the optimism is the growing population of elders in America. Currently, there are 55.8 million seniors and that figure is expected to reach 73.1 million by 2030, according to the U.S. Census Bureau. 

“As the population ages, more and more people tend to need health insurance,” said John Boylan, a senior analyst at Edward Jones. “And a lot of these insurance companies are major providers for Medicare and things like Medicare Advantage.”

As more seniors enroll in MA plans–rather than “Original Medicare” because of extra benefits and lower out-of-pocket cost limits–investors are optimistic about the future of the industry because the products health insurers are providing to millions of people are federally funded and a recurring revenue stream for these companies, said Kevin Hill, an active private equity investor in the healthcare industry for over two decades.

“I’m bullish on them [health insurers], but you know, short term, who knows?”