Friday, March 19, 2010

The Age of the Exchange

If the Obama Administration is successful in squeezing a health care reform bill out of Congress, the health insurance industry will under go some major changes. As we have outlined in previous posts, the addressable market will expand dramatically as individuals will be required to get minimum coverage and health insurance companies will be required to offer guaranteed coverage. The bill as it stands today will also provide for a so-called health insurance “exchange” to give consumers better choices for health insurance.

The exchange concept could be one of the greatest benefits of the legislation. What could be more conducive to free market forces than platform that allows consumers to compare policies by premium and benefits? Could the shrill opposition to the health care bill perhaps arise from those who prefer the well protected oligopoly that insurers currently enjoy?

eHealth, Inc. (ENTH: Nasdaq) has developed an exchange platform that is currently in use in Massachusetts and Utah. We see EHTH has an interest way to play reform as we expect the exchange concept to gain popularity whether the Democrats legislation passes or not. eHealth has done well with its online health insurance brokerage. The cash conversion rate in 2009 was 22.3% on $134.9 million in sales. Given the relatively low capital requirements for the principally web-based software business model, eHealth’s cash balance is very “healthy” at $153 million at the end of December 2009.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Crystal Equity Research has a Buy rating on EHTH.

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