Health Insurance Innovations ( Nasdaq - HIIQ ) -- Keeps its Edge

Health Insurance Innovations (HIIQ $10.00) launched a series of low cost ("skinny") policies last week.  The company is a leading provider of short term medical plans.  Those products generally provide the same coverage as conventional major medical insurance.  But they are exempt from regulatory features that tend to drive up prices like guaranteed issue (can't reject an applicant), guaranteed renewability, and mandated coverages (chiropractors, fertility clinics, etc.).  HII's prices are substantially lower as a result, particularly for young and healthy customers.  That group is slated to take it on the chin when the Affordable Care Act goes into effect in 2014.  The Government and the insurance carriers are trying to create the impression that anyone without medical insurance will have to buy it through an "exchange," or pay a steep fine.  Those products are designed to be way over-priced in relation to risk for healthy young Americans.  A loophole in the law is allowing the carriers to offer cheaper deals for that group, for 2014 only, by letting them sign up by December instead of in January.  The insurance companies began exploiting that provision in April, the idea being to get that healthy group on board now and then escalate the rates in 2015.

HII recently launched an even lower priced set of policies to thwart that competitive threat.  Coverages were reduced in response to the insurance companies' "skinny" offerings.  The main difference is a cap on daily hospital payments at $3,000 instead of the local "customary" rate.  Prices are about $80 a month for a healthy 30 year old man.  That's about half of what the insurance companies are offering today with their introductory pricing, and 25% of what a comparable exchange plan will cost down the road.

The latest initiative is likely to re-establish HII's sales momentum.  Margins are expected to be similar to the company's existing offerings.  Solid gains are likely this year and in 2014 as healthy consumers opt for the company's low cost policies.  With the new law, moreover, if a customer does come down with a catastrophic disease he can move to the exchange and buy a guaranteed issue plan.  That removes the one big negative that used to impact HII's business in the past.

There are two principal long term risks.  The first is that HII and the rest of the short term medical industry become too successful and the Government outlaws their business.  The other is a change in pricing by the Government so healthy people pay a number more consistent with their risk, like every other kind of insurance.  Neither appears likely to happen.  Even simple corrections to the law aren't being made due to political factors.  Major changes lie far in the future.  And it's likely that short term medical plans will prove to be a positive element in the overall scheme by getting more people covered.

Growth could be explosive as the new insurance environment takes effect.  In 2-3 years revenues could reach $175 million to produce income of $2.00 a share.  Applying a P/E multiple of 20x suggests a target price of $40 a share, potential appreciation of 300% from the current quote.

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