Health insurers: not so healthy?

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Investors thinking of adding health-insurance stock to their portfolios to vaccinate them against inflation might want to think again. “While health-insurance companies have traditionally been regarded as recession hedges, or defensive stocks, I would shy away from them right now,” says Edward R. Clarke, senior partner at Lohengrin Group, an investment firm, who explains that several major companies recently issued earnings warnings.

Pam Krueger, creator and co-host of the PBS series “MoneyTrack,” advises taking a long-term approach if you’re going to invest in them. “When the overall economy is sickly, stock analysts love to recommend health-insurance stocks, because no matter what the outlook might be for consumers, health care and health insurance is not a luxury, it is a necessity, and employers are often paying the premiums,” she says. Keep in mind, though, that medical costs are more than double that of inflation, 7 percent compared with 3 percent, and there’s an aging baby boomer population. That said, “the largest health insurers are best positioned to be long-term winners because of sheer size,” Krueger says. So, look to companies, such as UnitedHealth (NYSE: UNH; Price: $33.03) and WellPoint (NYSE: WLP; Price: $55.44).

Despite its size, Humana (NYSE: HUM; Price: $48.55) is less desirable, because most of its revenue is tied to Medicare, “so the company’s profitability would be affected by cuts in government funding or changes in regulation,” Krueger adds.