Health insurers should beat their own conservative earnings forecasts this year, according to a Stifel Nicolaus analyst, who said a number of issues that would be favorable for the companies are becoming more certain.
Analyst Tom Carroll upgraded shares of WellPoint Inc., UnitedHealth Group Inc. and Coventry Health Care Inc. to "buy" from "hold" Thursday. WellPoint and UnitedHealth are the two largest insurers based on both enrollment and revenue.
Many insurers have predicted more meager profits this year, but Carroll believes that guidance was based on a "profusion of conservatism." The analyst said that several uncertainties hanging over companies have become more visible, and the impact is "mostly benign."
Last month, the Centers for Medicare and Medicaid Services said it will raise 2012 Medicare Advantage payment rates by an average of 1.6 percent, a preliminary increase that was better than analysts expected.
Carroll also said he expects a new health overhaul provision regarding medical-loss ratios to be manageable. Those ratios measure the percentage of premiums an insurer spends on care. Starting this year, the overhaul requires insurers to meet certain percentages or pay rebates to consumers.
WellPoint, which runs Blue Cross and Blue Shield plans in 14 states, has said it expects a $300 million hit from the new measure this year.
But Carroll said insurers are not taking into account the possibility that the federal government may grant waivers to some states. That would allow them to ease in the new percentages and lessen the impact on insurers.
The analyst also noted medical costs appear to be reasonably stable despite an expected increase, and insurers do not appear to be pricing their coverage too low, a move that grows enrollment but hurts profit margins.
"Key operating fundamentals look to be favorable and predictable across the industry," the analyst wrote.
Shares of the three companies all climbed higher than the 1.7 percent increase from the Standard & Poor's 500 on Thursday.
— WellPoint rose 2.9 percent, or $1.95, to $68.77 in afternoon trading.
— UnitedHealth also was up 2.9 percent, or $1.27, to $44.70.
— Coventry climbed 6 percent, or $1.83, to $32.41.