Goldman Sachs forecasts positive outlook for insurers in 2022, buoyed by shift to value-based care

Global investment bank Goldman Sachs projects the pursuit of value-based care could potentially bring significant payoff for big insurers in 2022.

For the next two years, analysts Nathan Rich and Lindsay Golub estimate a potential 13% annual earnings per share growth for large-cap managed care organizations (MCOs), more than double the firm’s 6% projection for S&P EPS growth, according to a recent report.

Citing a positive outlook for the managed care space, Goldman Sachs has initiated its coverage of publicly traded U.S. health insurers, issuing "buy" ratings for five of them, including UnitedHealth and Anthem.

"The growing momentum behind value-based care (VBC) and efforts to diversify into provider services position the MCOs well to begin to bend the medical cost curve and capitalize on new profit streams," Rich and Golub wrote in the report.

The analysts note that rising interest rates, inflation and a supportive policy backdrop ahead of the midterms could be tailwinds for the industry. But managed care organizations still trade roughly in line with their historical five-year discount to the S&P of -18%, the analysts argued.

"Given the strong earnings outlook, we see potential for attractive returns even without multiple expansion," they wrote in the report.

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CVS Health, Molina Healthcare and Alignment Healthcare also received "buy" ratings from Goldman while Humana, Cigna, Centene and Bright Health Group were rated "neutral."

Rich and Golub have issued a "sell" rating on Oscar Health. The Wall Street giant put a tag of $6.50 on the stock. Oscar closed 4% lower Monday at $10.46 and also traded 11% lower Tuesday morning.

The "sell" rating comes nine months after Goldman Sachs was the lead underwriter to the healthcare platform’s IPO.

Like many tech-based companies, Oscar is still on the hunt for profitability. The company has historically struggled to turn a profit, both as a private firm and since going public. It posted a net loss of $212.7 million in the third quarter of 2021.

The analysts are bullish on the near- and long-term opportunity for "already dominant" UnitedHealth as the company drives earnings power through OptumCare.

"UNH’s strong provider footprint is well-positioned to capture what we see as a $6.7-$11.9 billion incremental profit opportunity from capitating OptumCare’s existing Medicare Advantage patient base, with upside as that patient pool grows," they wrote in the report. "We also see conservatism in its 2022 outlook from a greater recapture of the 2021 COVID headwind of $1.80, potential MLR upside as UNH priced conservatively, and the outperformance of OptumHealth."

Rich and Golub also see positive momentum behind CVS’ new primary care-focused care delivery strategy, complemented by its stores/HealthHUBs, which present an "interesting opportunity to address a large total addressable market from capitating Aetna MA members, with limited expectations priced in at these levels," they wrote.

While CVS has been challenged with how to best leverage its retail footprint, the opportunity from capitating Aetna’s MA members is significant, with a $3 billion to $5.3 billion in profit potential, they wrote in the report.

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"We see compelling long-term optionality if CVS can build out a PCP base, layer on store services, and complement with a suite of virtual care and home solutions," the analysts noted.

Molina Healthcare has a "long runway for organic market share capture in existing markets, with additional opportunities to grow membership via new RFP wins and tuck-in acquisitions of lower-performing health plans," according to the report.

The analysts called out Anthem's early efforts to transform its business with IngenioRx and its diversified business group. "We see the potential for Anthem to sell-in its PBM, provider and care management services to its vast commercial member base, grow its MA market share, and continue to expand its suite of DBG solutions through M&A. While the value of these assets still needs to be fully proven out, the growth of IngenioRx and DBG has been compelling so far and have potential to contribute meaningfully to EPS growth annually in the coming years," Rich and Golub wrote.

In explaining its sell rating for Oscar, the analysts noted the company faces risk to its multiyear path to profitability with increased competition in the market.

"We would become more positive on the stock if the company demonstrated the ability to profitably scale or saw more traction with health plan partnerships as an indication of the monetization of its technology platform investments," the analysts wrote.