There are numerous opportunities for investing today.
When it comes to determining where and what companies to invest in, many times health insurance companies are overlooked.
They are often considered the "gatekeepers" of health care because they play a large role in determining which doctors are seen and how much the patient pays.
This means they exert an enormous amount of control over the healthcare system.
However, they also provide a necessary service, and this positions them as a very stable investment option.
When reviewing health insurance companies for investment possibilities, it is important to understand how they work, and what drives their profits.
This topic should be researched thoroughly before a decision is made.
One thing that is important to remember is that insurance companies can be categorized based on payor structure.
Payors can be private companies, governmental entities, and individuals.
The largest insurance companies in the United States have a diversified payor mix.
It is possible to be weighted toward one particular kind of payor, and still include the others in the payor structure.
The payor structure is important because it can point toward the stability, or lack thereof, of cash flow and profits.
For example, individuals can be an unreliable source of cash, while private companies are the most stable form of payor.
There are also some ratios that are unique to insurance companies that can aid in the decision making process.
Some of these are, EBITDA/ Revenue, EBIT/Revenue, and Consolidated MCR (Medical Expense/ Premiums.
) These ratios can give an idea of how stable and profitable a particular insurance company is.
The MCR is a key ratio to consider when looking at investing in health insurance.
This ratio reveals how high medical expenses are as a percentage of premiums.
A low medical cost is desired by investors.
Change in pricing relative to change in medical expenses over the year is also a key ratio.
In the ideal situation, the pricing change would grow more quickly than, or at least equal to, the change in medical expenses.
Health insurance companies are non-cyclical and stable due to the fact that they provide a necessary service.
In recent years many of them have branched out to provide more varied services.
This means that in analyzing financial statements, it could be that not all profits were derived from the actual health insurance service.
Keeping that in mind, along with diligent research, could yield favorable investment opportunities in the health insurance field.