Rising Health Insurance Premiums: Opportunities and Challenges for Investors
Source and citation: Group Health Policies Lead the Way as Medical Inflation, Retail Premiums Bite, ET Bureau, Economic Times, January 9, 2024
Analysis for Layman
Health insurance premiums in India are on the rise due to soaring medical inflation. To cope with these escalating costs, more employers are offering group health policies as benefits to their staff.
Group health policies have experienced faster growth compared to individual plans, especially during the COVID-19 pandemic, covering more individuals. However, only 37% of Indians currently have health cover, leaving a significant portion exposed to substantial out-of-pocket costs during illnesses.
Given an annual healthcare inflation rate of 12-15%, double the normal inflation rate, more Indians are now opting for health insurance plans. The forecast predicts a significant increase in the total lives covered, from 3.5% annually to 11.3% between 2023-2028.
The leading driver of this growth is anticipated to be group policies, expected to grow at a rate of 16.6% yearly. This surge is attributed to rising incomes and the expansion of staff benefits by IT/ITES, healthcare, consulting, and consumer firms.
Impact on Retail Investors
For retail investors, the rapid growth in premiums presents opportunities and challenges. Health insurers like Star Health and ICICI Lombard are poised to benefit, as are hospital firms such as Apollo and Fortis. Diagnostic chains like Metropolis and Dr Lal Pathlabs are likely to see increased test volumes.
Pharmaceutical firms may gain from higher medicine sales, with stocks like Sun Pharma, Lupin, and IPCA Labs potentially offering opportunities. Medical equipment makers like Poly Medicure and Opto Circuits also stand to benefit.
However, increased health premiums cutting into disposable incomes could negatively impact industries like automobiles, consumer durables, and discretionary spending. Balancing investments in both sets of stocks within a portfolio is advisable for investors.
Over the long run, higher insurance coverage contributes to financial stability and formality in the economy. Yet, the containment of costs remains essential. Stocks with pricing power, stemming from patents and strong brands, are advantageous in this environment.
Impact on Industries
The health insurance industry directly benefits from the surge in demand for group policies. Companies like Star Health, ICICI Lombard, and HDFC Ergo are expected to witness over 20% premium growth, with rising corporate tie-ups seen as positive.
Hospitals are likely to experience higher patient footfalls and occupancy rates as more people acquire health cover. Leading national chains like Apollo and Fortis are expanding into Tier-2/3 cities to tap into this growing demand.
Diagnostic chains are also poised to gain, with companies like Metropolis and Dr Lal Pathlabs increasing their collection centers beyond metros.
Pharmaceutical firms focusing on high-value chronic medicines and devices, including Sun Pharma and Lupin, stand to gain. Higher insurance coverage provides better pricing power for patented products.
Medical equipment manufacturers such as Poly Medicure and Opto Circuits are expected to witness a rise in their order books as corporate hospitals and nursing homes expand capacity.
Long Term Benefits & Negatives
Over the long term, higher health insurance penetration improves financial stability for households, providing a safety net against catastrophic costs of serious ailments for a larger portion of the population.
For the healthcare sector, increased insurance coverage offers revenue visibility and formalization, with improved service quality and compliance culture driven by institutional money.
Policyholders benefit as group covers negotiate competitive treatment packages, potentially helping moderate medical inflation over time.
However, the tax-exempted nature of health insurance can lead to unnecessary care consumption, raising system costs. Measures such as increasing co-pays and deductibles are essential to cut moral hazards. Fraud control systems also need substantial investments.
Short Term Benefits & Negatives
Over the next 1-2 years, health insurers, hospitals, diagnostic chains, pharmaceutical firms, and medical device makers are poised to benefit from surging volumes and order flows.
However, retail health policyholders may continue to face premium challenges, and a resurgence in cost inflation poses a threat that requires monitoring. Global recession risks impacting salary hikes and corporate health covers are additional concerns.
Despite these downsides, the policy push for insurance coverage for all suggests positive prospects for healthcare stocks in 2024-25. Investors are encouraged to use any market panic as an opportunity to accumulate quality stocks in the sector.
Potential Impact of Rising Group Health Insurance on Companies:
Indian Companies to Gain:
- Medi Assist (IPO candidate): As India’s largest TPA, Medi Assist stands to directly benefit from the booming group health insurance segment. Increased employer-sponsored policies lead to more lives covered, translating to higher TPA fees and potential market share gains for Medi Assist, positively impacting their IPO prospects.
- Private Health Insurance Companies: Companies like Star Health, ICICI Lombard, and HDFC Ergo stand to gain from the overall growth in health insurance premiums, driven by the rising popularity of group policies. This could lead to increased revenue, profitability, and potentially higher stock valuations.
- Hospitals and Healthcare Providers: A larger insured population under group plans could lead to higher patient volumes and utilization rates for hospitals and healthcare providers like Apollo Hospitals, Fortis Healthcare, and Max Healthcare. This could boost their revenues and potentially drive stock price appreciation.
- Wellness and Preventive Healthcare Companies: Increased focus on employee health and wellness by companies could benefit players like GOQii, Cult.fit, and HealthifyMe. Demand for their corporate wellness programs and fitness solutions could rise, potentially driving their growth and stock performance.
- Pharmaceutical Companies: A larger insured population may lead to increased consumption of medicines, benefiting pharmaceutical companies like Sun Pharma, Cipla, and Dr. Reddy’s Laboratories. However, this might be offset by price controls and government regulations in the pharma sector.
Indian Companies to Lose:
- Stand-alone Health Insurance Agents: As group policies are often negotiated directly between employers and insurers, the role of individual agents might diminish. This could negatively impact the business of traditional insurance agents, potentially leading to lower income and job losses.
- Public Sector Health Insurance Companies: Public sector insurance companies like United India Insurance and Oriental Insurance might face stiff competition from private players in the growing group health insurance segment. This could lead to market share losses and potentially impact their profitability and stock performance.
Global Companies to Gain:
- Multinational Healthcare Companies: Global healthcare giants like UnitedHealth Group and Aetna with operations in India could benefit from the overall growth in the health insurance market. They could potentially offer specialized group health plans to multinational companies operating in India, expanding their market share and profitability.
- Global Reinsurance Companies: Munich Re, Swiss Re, and other global reinsurance companies could see increased demand for their services as Indian insurers look to manage risks associated with larger group health plans. This could boost their reinsurance premiums and potentially drive stock price increases.
Global Companies to Lose:
- Small and Regional Health Insurance Companies: Smaller global health insurers without a strong presence in India might struggle to compete with established domestic players in the booming group health insurance segment. This could lead to market share losses and potentially impact their overall growth prospects.
Important Note: This analysis is based on the information provided in the news article and should not be considered financial advice. Please consult with a professional financial advisor before making any investment decisions.