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Analyst sees private exchanges helping group insurance sales

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A push by some employers to move their worker health coverage to private exchanges may benefit managed care stocks, according to Citigroup.

Walgreen Co., the nation’s largest drugstore chain, said last week that it will move its coverage to a private insurance exchange run by the benefits consultant Aon Hewitt. The switch will give workers as many as 25 plans to choose from instead of two to four options provided by their employer.

This approach, called defined contribution health insurance, involves giving employees a set amount of money and then letting them pick their own coverage through a private marketplace or exchange that helps them sort out the choices. It can give workers more coverage options and make health care expenses more predictable for employers, many of whom have struggled with spiraling costs for years.

Citi analyst Carl McDonald sees the Walgreen announcement as a positive because of the type of business it could deliver to health insurers. He noted that big employers like Walgreen typically pay their own claims and hire insurers only to administer the policies. That type of coverage produces smaller revenue totals for insurers, as opposed to so-called fully insured plans where the managed care company pays the claims as well.

Walgreen will shift to fully insured coverage with its new approach. That could deliver big revenue gains to insurers.

“We’ve said many times in the past that the single biggest structural positive we can think of for the managed care stocks is if a significant number of self-funded employers become fully insured,” McDonald said in a research note.

However, he also noted that the profitability of this coverage may become squeezed because insurers will be competing against each other on these exchanges, and coverage prices could fall. He noted that Cigna Corp. (NYSE:CI), in particular, may face challenges because they don’t have a large presence in fully insured coverage.

“So they’ll have to prove they can compete in a private exchange environment,” McDonald wrote.

In contrast, WellPoint Inc. (NYSE:WLP) has more than 15 million people enrolled in fully insured coverage and widespread brand recognition through its Blue Cross-Blue Shield plans.

Shares of Cigna and WellPoint remained unchanged from their closing prices Friday of $78.59 and $82.33, respectively.

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