Health insurers Humana Inc. and HealthSpring Inc. have promising growth prospects, partly because of their Medicare Advantage businesses, according to an Oppenheimer analyst who upgraded shares of both companies to "Outperform" from "Perform."
Medicare Advantage plans are privately run versions of the government's Medicare program for people over age 65. Subsidized by the government, the plans offer basic Medicare coverage topped with extras or premiums lower than standard Medicare rates.
Analyst Michael Wiederhorn said in a Wednesday morning research note that baby boomers continue to favor these plans over regular Medicare. A recent Centers for Medicare and Medicaid Services projection for 10 percent Medicare Advantage growth in 2012 "further solidifies the industry's promising growth prospects." He also said he believes Medicare Advantage plan providers will not be vulnerable to reimbursement cuts that come out of deficit reduction negotiations in Washington, D.C.
The analyst said the stocks of both Humana, based in Louisville, Ky., and HealthSpring, of Franklin, Tenn., appear undervalued.
"Overall, we believe the Medicare names will be an attractive way to play the managed care space over the coming 12-18 months due to a strong growth outlook, stable margins and a relatively stable reimbursement environment," the analyst wrote.
Health insurer earnings also have been helped in recent quarters by slower-than-expected growth in health care use. Wiederhorn said he would not be surprised if this trend continues.
Wiederhorn also raised his 12- to 18-month price target on Humana shares to $87 from $83 and for HealthSpring to $45 from $43. Shares of Humana closed at $71.81 Tuesday, and HealthSpring at $38.