Strangely, Coronavirus could kill health insurance companies such as Anthem Inc. (NYSE: ANTM).
The coronavirus pandemic could hurt Anthem in two ways. First, coronavirus medical costs could force Anthem to increase premiums by up to 40%, Salon claims. I think such increases could cause many people to cancel health insurance and reduce Anthem’s profits.
To explain, insurers base premiums on medical costs. Coronavirus patients need expensive treatments including ventilators and visits to the Intensive Care Unit (ICU). The Covid Tracking Project estimates Coronavirus hospitalized over 41,000 Americans on 6 April 2020, Barron’s reports.
Moreover, 30% of COVID-19 patients need hospitalization, Barron’s claims. The Johns Hopkins Coronavirus Resource estimates authorities reported 26,000 in the USA on 5 April 2020. Hence, doctors could need to hospitalize up to 7,800 people a day. I estimate that 30% of 26,000 is 7,800.
Why Coronavirus could destroy Anthem
Coronavirus could be fatal to Anthem (NYSE: ANTM) because the company claims its health insurance plans serve 79 million people. In addition, Anthem claims 41 million people participate in its Blue Cross/Blue Shield health insurance plans.
Anthem’s finances are in danger because Harvard University epidemiologist Marc Lipsitch 40% to 70% of the population will catch COVID-19, CBS News claims. If Lipsitch is correct, 40% to 70% of Anthem’s policyholders will catch Coronavirus. In addition, 30% of those people could require hospitalization.
Up to 16.59 million Anthem policyholders could require hospitalization for coronavirus, under the worst case scenario. In detail, my calculator estimates 70% of 79 million is 55.3 million and 30% of 55.3 million is 16.59 million.
Consequently, coronavirus costs could wipe out the $25.988 billion in cash and short-term investments Anthem reported on 31 December 2019, instantly. Hence, Anthem could go from a cash rich insurer with $77.453 billion in assets to broke overnight. To explain, Anthem had $77.453 billion in total assets on the last day of 2019.
Can Anthem Make Money in the Coronavirus Age?
Before Coronavirus, Anthem was a good company in great shape. For instance, Stockrow estimates Anthem’s revenues grew at a rate of 17.26% in the quarter ending on 31 December 2019.
Impressively, Anthem earned a gross profit of $4.875 billion on revenues of $27.407 billion in the quarter ending on 31 December 2019. Additionally, Anthem reported a common net income of $934 million and an operating income of $1.291 billion on 31 December 2019.
Moreover, Anthem reported an investing cash flow of $723 million, an operating cash flow of $1.327 billion, and an ending cash flow of $747 million on 31 December 2019. Therefore, Coronavirus costs could eat up all of Anthem’s cash flow in a few days.
Thus, the 95₵ dividend Anthem paid on 13 March 2020 could be the last for a long time. Anthem could go from a decent dividend stock to a basket case over night.
Is Anthem doomed by Coronavirus?
Interestingly, Mr. Market has ignored Anthem’s vulnerability to Coronavirus so far. For instance, Anthem’s share price fell from $269.82 on 9 March 2020 to $232.09 on 7 April 2020. Interestingly, Anthem’s share price rose to $242.46 on 9 April 2020.
Hence, Anthem has kept most of its value. However, I think all it will take is a few weeks of high coronavirus care costs to wipe out Anthem.
Thus, the only salvation for Anthem (NYSE: ANTM) is for the federal government to underwrite all Coronavirus treatment costs. The federal government will pay for care for uninsured coronavirus patients, but it will not help insurance companies Axios reports.
Strangely, insurers are not allowed to bill patients for coronavirus treatment. However, the amount of money Uncle Sam will pay for coronavirus care is unclear. Hence, we could see Anthem collapse and require a federally bailout. Unfortunately, I think such a bailout could be politically impossible because health insurance companies are unpopular.
How the US Supreme Court could Hurt Anthem
Ironically, the U.S Supreme Court could be as bad for Anthem as coronavirus. To explain, the Supremes will hear two cases that could end Obamacare.
The plaintiffs in California v. Texas and United States House of Representatives v. Texas argue the Affordable Care Act is unconstitutional because Congress repealed the Obamcare tax, Vox claims. Consequently, a decision for the plaintiffs in those cases could end all of Obamacare.
Anthem could be hurt because tax-payer support for Obamacare exchanges that sell Anthem plans could end. In addition, Medicaid expansion that funds many Anthem plans could end. Notably, Anthem offers Medicaid plans in states such as Kentucky.
Should you dump your Health Insurance Stocks?
Coronavirus and the Supreme Court show how a Black Swan Event can destroy even the safest stocks.
Thus, Coronavirus shows why every investor needs to diversify his or her portfolio. To clarify, diversification means that you need to own several kinds of stock. For example, a combination of tech stocks, insurance companies, finance companies, and industry.
Coronavirus shows that there is no such thing as a safe stock. The Black Swan could destroy any stock with unexpected events. Anthem (NYSE: ANTM) shows that a Black Swan can wipe out any stock’s value. Thus, now could be a good time to dump some of your health insurance stocks.
Originally published at https://marketmadhouse.com on April 9, 2020.