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2 HMO Stocks Poised to Thrive Despite Escalating Medical Costs
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The U.S. health insurance industry, referred to as Health Maintenance Organization (HMO), is poised to benefit from expanding commercial plans suite, which offers higher margins and reduced regulatory risk, while also leveraging favorable financing conditions from 2025 expected interest rate cuts to pursue mergers and acquisitions (M&A). Medicare Advantage rate hikes expected in 2026 are likely to provide additional margin support. However, profitability remains under pressure from rising medical costs linked to deferred care, greater utilization, chronic conditions and expensive specialty drugs such as biologics and cancer therapies. Further challenges arise from regulatory uncertainty surrounding Medicaid funding reductions and changes to ACA subsidies. Despite these hurdles, companies like The Cigna Group (CI - Free Report) and Humana Inc. (HUM - Free Report) appear well-placed to counter industry headwinds.
About the Industry
The Zacks HMO industry consists of entities (either private or public) that take care of subscribers’ basic and supplemental health services. Companies in this space primarily assume risks and assign premiums to health and medical insurance policies. Industry participants also provide administrative and managed-care services for self-funded insurance. Services are generally offered by a network of approved care providers (called in-network), which include primary care physicians, clinical facilities, hospitals and specialists. However, out-of-network exceptions are made during emergencies or when necessary. Health insurance plans can be availed through private purchases, social insurance or social welfare programs.
4 Trends Shaping the Fate of the HMO Industry
Escalating Medical Costs: Medical costs for health insurers in the United States are rising due to a combination of factors. Return of deferred care, screenings and chronic disease management led to an increase in utilization and claims. Prescription drug costs, especially from expensive specialty medicines like cancer therapies and biologics, continue to grow rapidly. All these have strained the Health Benefit Ratio, which acts as a measure of profitability for health insurers, and subsequently, puts pressure on profit margins. In fact, elevated medical costs had probably compelled health insurers UnitedHealth Group, Centene and Elevance Health to slash their respective earnings guidance for 2025.
Regulatory Challenges: Health insurers in the domestic market are currently facing increasing regulatory uncertainty. Proposals like the One Big Beautiful Bill Act aim to cut federal Medicaid funding, add work requirements and tighten eligibility checks, which could reduce the number of insured people and shrink reimbursements for providers and insurers. Additionally, reductions in ACA subsidies may depress enrollment in marketplace plans. Commercial insurance plans generate higher margins than Medicaid and ACA marketplace plans. Therefore, health insurers are placing strong emphasis on boosting their commercial plans portfolio, which has less volatile cost structures and regulatory risk. Nevertheless, the Medicare Advantage rate increases expected in 2026 may provide some margin relief.
Shortage of Healthcare Professionals: The nationwide shortage of nurses and other healthcare professionals continues to challenge the efficient operations of hospitals, which face rising patient volumes. Factors such as the aging nursing workforce, high levels of burnout and unequal workforce distribution contribute to this staffing crisis. HMOs partner with hospitals, physicians and other healthcare providers to offer discounted care to their members. The quality and effectiveness of these services are critical to renewing health plans with customers. A reduced nursing workforce can hinder hospitals' ability to provide high-quality care, which in turn can impact the customer retention and satisfaction of HMO companies.
Strategic Emphasis on Mergers and Acquisitions: Alongside technological advancements, HMOs often pursue M&As to broaden capabilities, enter new markets, strengthen their presence in existing ones, expand their customer base and reinforce their nationwide footprint. These initiatives also provide essential diversification, helping companies sustain a competitive advantage. With the Federal Reserve recently announcing a cut in the interest rate for the first time in 2025 and with further rate cuts expected in 2025, borrowing costs will likely decline, creating more favorable conditions for industry players to secure financing for M&A activities without heavily drawing down cash reserves.
Zacks Industry Rank Indicates Bearish Outlook
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all member stocks, indicates tepid near-term prospects. The Zacks Medical-HMOs industry is housed within the broader Zacks Medical sector. It currently carries a Zacks Industry Rank #232, which places it in the bottom 5% of 245 Zacks industries.
Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate.
Despite the dismal scenario, we will present two stocks that one can retain, given their solid growth endeavors. But before that, it is worth looking at the industry’s recent stock-market performance and the valuation picture.
Industry Underperforms S&P 500, Sector
The Zacks Medical-HMO industry has declined 36.8% in the past year against the Zacks S&P 500 composite’s 17.7% growth. The Zacks Medical sector fell 17.8% in the same time frame.
One-Year Price Performance
Image Source: Zacks Investment Research
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing medical stocks, the industry trades at 21.5X compared with the S&P 500’s 23.36X and the sector’s 19.17X.
In the past five years, the industry has traded as high as 19.57X and as low as 11.58X, the median being 16.2X, as the chart below shows.
Forward 12-Month Price/Earnings (P/E) Ratio
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
2 Stocks to Watch
We present two stocks from the space with a Zacks Rank #3 (Hold). Considering the current industry scenario, it might be prudent for investors to retain these stocks in their portfolios, as these are well-placed to generate growth in the long haul.
Cigna: Based in Connecticut, the company continues to thrive on the solid performance of its two growth platforms—Evernorth and Cigna Healthcare. Evernorth is strengthened by its extensive range of specialty pharmacy solutions, while Cigna Healthcare benefits from a wide customer base across its U.S. Healthcare division. The rising proportion of elderly individuals in the United States is expected to drive ongoing demand for the company’s Medicare offerings. Consistently, the insurer broadens its product portfolio and accelerates growth through strategic acquisitions and collaborations with leading healthcare systems.
The Zacks Consensus Estimate for Cigna’s 2025 earnings is pegged at $29.69 per share, indicating 8.6% growth from the prior-year figure. The consensus mark for revenues indicates a 8.1% improvement from the year-ago actual. The consensus mark for CI’s 2025 earnings has moved 0.1% north over the past 60 days.
Price & Consensus: CI
Image Source: Zacks Investment Research
Humana: Headquartered in Kentucky, Humana has maintained steady growth fueled by rising premiums and an expanding membership base in its Medicare and Medicaid businesses. The strong performance of these plans has secured the company multiple new contracts and renewals with both federal and state agencies. Through its CenterWell brand, Humana continues to focus on meeting the healthcare needs of the nation’s senior population. Over the years, the company has also pursued strategic acquisitions—such as Family Physicians Group, iCare, and Inclusa—which have broadened its revenue streams and strengthened its geographic presence.
The Zacks Consensus Estimate for Humana’s 2025 earnings is pegged at $16.99 per share, indicating a 4.8% rise from the 2024 figure. The consensus mark for revenues implies 9.3% growth from the 2024 figure. HUM’s earnings surpassed estimates in three of the last four quarters and missed the mark once, the average being 9.59%.
Price & Consensus: HUM
Image Source: Zacks Investment Research
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2 HMO Stocks Poised to Thrive Despite Escalating Medical Costs
The U.S. health insurance industry, referred to as Health Maintenance Organization (HMO), is poised to benefit from expanding commercial plans suite, which offers higher margins and reduced regulatory risk, while also leveraging favorable financing conditions from 2025 expected interest rate cuts to pursue mergers and acquisitions (M&A). Medicare Advantage rate hikes expected in 2026 are likely to provide additional margin support. However, profitability remains under pressure from rising medical costs linked to deferred care, greater utilization, chronic conditions and expensive specialty drugs such as biologics and cancer therapies. Further challenges arise from regulatory uncertainty surrounding Medicaid funding reductions and changes to ACA subsidies. Despite these hurdles, companies like The Cigna Group (CI - Free Report) and Humana Inc. (HUM - Free Report) appear well-placed to counter industry headwinds.
About the Industry
The Zacks HMO industry consists of entities (either private or public) that take care of subscribers’ basic and supplemental health services. Companies in this space primarily assume risks and assign premiums to health and medical insurance policies. Industry participants also provide administrative and managed-care services for self-funded insurance. Services are generally offered by a network of approved care providers (called in-network), which include primary care physicians, clinical facilities, hospitals and specialists. However, out-of-network exceptions are made during emergencies or when necessary. Health insurance plans can be availed through private purchases, social insurance or social welfare programs.
4 Trends Shaping the Fate of the HMO Industry
Escalating Medical Costs: Medical costs for health insurers in the United States are rising due to a combination of factors. Return of deferred care, screenings and chronic disease management led to an increase in utilization and claims. Prescription drug costs, especially from expensive specialty medicines like cancer therapies and biologics, continue to grow rapidly. All these have strained the Health Benefit Ratio, which acts as a measure of profitability for health insurers, and subsequently, puts pressure on profit margins. In fact, elevated medical costs had probably compelled health insurers UnitedHealth Group, Centene and Elevance Health to slash their respective earnings guidance for 2025.
Regulatory Challenges: Health insurers in the domestic market are currently facing increasing regulatory uncertainty. Proposals like the One Big Beautiful Bill Act aim to cut federal Medicaid funding, add work requirements and tighten eligibility checks, which could reduce the number of insured people and shrink reimbursements for providers and insurers. Additionally, reductions in ACA subsidies may depress enrollment in marketplace plans. Commercial insurance plans generate higher margins than Medicaid and ACA marketplace plans. Therefore, health insurers are placing strong emphasis on boosting their commercial plans portfolio, which has less volatile cost structures and regulatory risk. Nevertheless, the Medicare Advantage rate increases expected in 2026 may provide some margin relief.
Shortage of Healthcare Professionals: The nationwide shortage of nurses and other healthcare professionals continues to challenge the efficient operations of hospitals, which face rising patient volumes. Factors such as the aging nursing workforce, high levels of burnout and unequal workforce distribution contribute to this staffing crisis. HMOs partner with hospitals, physicians and other healthcare providers to offer discounted care to their members. The quality and effectiveness of these services are critical to renewing health plans with customers. A reduced nursing workforce can hinder hospitals' ability to provide high-quality care, which in turn can impact the customer retention and satisfaction of HMO companies.
Strategic Emphasis on Mergers and Acquisitions: Alongside technological advancements, HMOs often pursue M&As to broaden capabilities, enter new markets, strengthen their presence in existing ones, expand their customer base and reinforce their nationwide footprint. These initiatives also provide essential diversification, helping companies sustain a competitive advantage. With the Federal Reserve recently announcing a cut in the interest rate for the first time in 2025 and with further rate cuts expected in 2025, borrowing costs will likely decline, creating more favorable conditions for industry players to secure financing for M&A activities without heavily drawing down cash reserves.
Zacks Industry Rank Indicates Bearish Outlook
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all member stocks, indicates tepid near-term prospects. The Zacks Medical-HMOs industry is housed within the broader Zacks Medical sector. It currently carries a Zacks Industry Rank #232, which places it in the bottom 5% of 245 Zacks industries.
Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate.
Despite the dismal scenario, we will present two stocks that one can retain, given their solid growth endeavors. But before that, it is worth looking at the industry’s recent stock-market performance and the valuation picture.
Industry Underperforms S&P 500, Sector
The Zacks Medical-HMO industry has declined 36.8% in the past year against the Zacks S&P 500 composite’s 17.7% growth. The Zacks Medical sector fell 17.8% in the same time frame.
One-Year Price Performance
Image Source: Zacks Investment Research
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing medical stocks, the industry trades at 21.5X compared with the S&P 500’s 23.36X and the sector’s 19.17X.
In the past five years, the industry has traded as high as 19.57X and as low as 11.58X, the median being 16.2X, as the chart below shows.
Forward 12-Month Price/Earnings (P/E) Ratio
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
2 Stocks to Watch
We present two stocks from the space with a Zacks Rank #3 (Hold). Considering the current industry scenario, it might be prudent for investors to retain these stocks in their portfolios, as these are well-placed to generate growth in the long haul.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Cigna: Based in Connecticut, the company continues to thrive on the solid performance of its two growth platforms—Evernorth and Cigna Healthcare. Evernorth is strengthened by its extensive range of specialty pharmacy solutions, while Cigna Healthcare benefits from a wide customer base across its U.S. Healthcare division. The rising proportion of elderly individuals in the United States is expected to drive ongoing demand for the company’s Medicare offerings. Consistently, the insurer broadens its product portfolio and accelerates growth through strategic acquisitions and collaborations with leading healthcare systems.
The Zacks Consensus Estimate for Cigna’s 2025 earnings is pegged at $29.69 per share, indicating 8.6% growth from the prior-year figure. The consensus mark for revenues indicates a 8.1% improvement from the year-ago actual. The consensus mark for CI’s 2025 earnings has moved 0.1% north over the past 60 days.
Price & Consensus: CI
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for Humana’s 2025 earnings is pegged at $16.99 per share, indicating a 4.8% rise from the 2024 figure. The consensus mark for revenues implies 9.3% growth from the 2024 figure. HUM’s earnings surpassed estimates in three of the last four quarters and missed the mark once, the average being 9.59%.
Price & Consensus: HUM
Image Source: Zacks Investment Research