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Aetna Inc. (AET), Cigna Corporation (CI): Healthcare Changes Provide New Opportunities

The Affordable Care Act will require certain changes in the market with regards to insurance coverage, employment benefits, and the cost of hiring employees. Companies that can offer viable solutions to people and other organizations will provide excellent opportunities to investors.

The product

An interesting insurance product that offers short-term flexibility and lower premiums is the short-term medical plan. These plans offer similar coverage as the major medical plans. The main difference is these plans are only for 30 days to 12 months.

The plans are much easier to qualify for because they aren’t as comprehensive as major medical coverage. They usually do not cover prescription drugs or preventative medicine. It does provide an option for healthy individuals to have a fall-back insurance plan. It is used often in times of transition.

The demand for these types of insurance plans is expected to increase in the next few years as health insurance premiums change. Consumers and many insurance brokers aren’t very familiar with this type of coverage, so there will be an uphill battle at first. But, there are great profits to be made.

A key player

One of the key players in the short-term medical insurance space is Health Insurance Innovations Inc (NASDAQ:HIIQ). It specializes in twelve month STM and recently had an initial public offering placing its shares at a $14 valuation. Two months later the stock is trading just under $15 per share.

This is a pretty small company with a market cap of only $75 million but does focus on this one product. Most of the major insurance companies do offer this insurance product, though.

Other major insurers

Aetna Inc.Naturally, when there is an opportunity in the market, big players are going to catch wind and challenge the small companies. Companies like Cigna Corporation (NYSE:CI) and Aetna Inc. (NYSE:AET) are well-funded managed care companies that have the ability to expand their current STM options.

Both of these companies already offer short-term medical insurance options to consumers.

Cigna has been expanding its collaborative accounts care to more physician groups in 24 states. This plan gives a pay for value structure to physician groups if those physician groups meet a set goal of improving the overall health of its patients. By partnering with physician groups CIGNA Corporation (NYSE:CI) can target its “triple aim” of improving “health, affordability and patient experience.”

The company has a goal of increasing these programs to include one million customers by 2014. It began this program in 2008 and the company’s earnings have been steadily growing. In the next year analysts are expecting a 6% growth.

But healthcare payouts for the company have grown in the past. In 2012 alone, they grew by 42% from the previous year. So the company may look for additional opportunities as the healthcare market is changing.

Aetna’s stock reached a new 52-week high recently as investors became more confident of the industry in general. The company has also done an excellent job at growing both revenue and earnings.

Aetna Inc. (NYSE:AET) is also encountering significant increases in healthcare costs and insurance payouts. This could lead the company to look at increasing its short-term insurance policies.

Humana Inc (NYSE:HUM) is another major insurance company that offers short term health insurance under the branded name HumanaOne. Humana has the largest market share of insurance of these three companies with 4.56%. Aetna has 4.13% and Cigna has 1.83%.

Although this company has the largest market share, it is the cheapest of the three in relation to earnings. Its price to earnings ratio is 9.78 while both Aetna Inc. (NYSE:AET) and CIGNA Corporation (NYSE:CI) have price to earnings ratio of over 11.

Humana has growth plans of providing more services to customers in the wake of announcements from the government on favorable reimbursement plans for optional Medicare.

Humana’s stock price had dipped because of fears that Medicare reimbursements would dip. The stock has begun to recover and may be attractive to investors.

Final thoughts

The healthcare industry is extremely complicated. Consumer demand, government regulation and the medical industry all add to the difficulties in finding the right company in which to invest. As the Affordable Care Act brings more changes in the future, one product to consider is short term health insurance. These companies offer this product and may be worth a look from investors.

The article Healthcare Changes Provide New Opportunities originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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