November 7, 2006: Health care: love it or leave it?

I am beginning to look at the managed health care industry in the U.S. for investment opportunities. This area is likely to come under political pressure from the democrats, but I believe that the industry holds excellent promise for the astute investor, so long as the investor remains vigilant for long term damage to the system via pronounced government interference (I do not think this will happen).

I do not like the group insurance companies. I do not like the commercial managed care companies.

I do like the Medicare managed care companies.This area appears to be the only fertile ground for growth at this time.The recent expansion of the Medicaid managed care is the beginning of a multi-year, secular shift. States will likely increasingly adopt managed care programs in an effort to replace outdated fee for service system. The market opportunity remains large and with more sophisticated rate setting, broad-based political support and greater diversification across many states, I believe that growth is going to be very good, indeed. The capabilities to address the large and growing Medicare market are with managed care companies.The privatization of this market will accelerate. Improving efficiencies with more sophisticated pricing will benefit the managed care companies and steer away political intrusion.

The companies that may benefit from this thesis are Centene Corporation (CNC) trading at 23.36, United Health Group (UNH) my personal favorite after being savaged for insider shenanigans at 47.83 and WellCare Health Plans (WCG) trading at 59.10.
You may also wish to check out Coventry Health Care (CVH), Health Net, Inc. (HNT) and Humana Inc. (HUM). I have not researched these three companies, and they may stand to profit as well from the managed health care growth story.