From Obamacare to Trumpcare: Find Bargain in Political Noises

CNC, MOH, 60%+ off ATH, lowest valuation

Background

Since Dec 2023, healthcare insurers, especially those heavily tied to government healthcare, have declined 30% to 60%, while the S&P 500 has gained 54%. That contrast becomes more noticeable over 20 years: insurers significantly outperformed SPY before the recent decline in late 2023.

The sharp turn since late 2023 happened for reasons. In this research, we will discuss:

1. The Market consensus that led to the price decline

2. To assess the validity of the consensus, I dived into the gov’t-sponsored healthcare:

   1. History/trends

   2. Insurer unit economics

   3. Various headwinds and regulatory uncertainty

3. Lay out my variant view.

4. My contrarian pick (paywalled)

The Obvious Bear Cases (Market Consensus)

Declining membership: In 2024 and early 2025, 1st time in a long time, many insurers reported a QoQ (and YoY) decline in membership, especially in Medicaid.

This unsettled the market despite being caused by a one-time anomaly: the Medicaid redetermination reverses the pandemic-era enrollment spike, when eligibility was paused, and membership hit 95Mn in April 2023. The redetermination resulted in 15Mn disenrollment so far.

It is worth noting that, from the “Big Five” Medicaid enrollment data, the pace of disenrollment has considerably slowed since the end of 2024.

Regulatory Uncertainty: Since the launch of Obamacare in the 2010s, government-sponsored healthcare has become a heated issue in party politics, and it reignited during the recent government shutdown.

Deteriorating profitability: Most insurers, esp. those heavily reliant on gov’t-sponsored ones (e.g., MOH, CNC, ELV), experienced significant declines in operating margins. This was driven by membership losses, increased utilization amid concerns about regulatory uncertainty, and surges in medical costs.

These three combined “justify” the market bearish sentiment and explain its serious underperformance over the last 24 months, especially given the looming uncertainty in the regulatory environment.

But… (Variant View)

High-profile gestures to ‘Kill’ Obamacare and a narrative portraying healthcare insurers as money-sucking entities create the perception that gov’t-sponsored healthcare insurers are uninvestable. However, a closer look reveals a different reality.

1. Gov’t-sponored healthcare is playing an increasingly larger role in the healthcare sector, and I will go over its history to explain that.

2. Insurers are vital in gov’t healthcare, with profits about 2% of spending, hardly indicating greed.

3. My view is that the “Trumpcare to replace Obamacare” is less about substance and more about the name change.

Let us unpack.