4 HMO Stocks to Watch Despite Escalating Costs, Nursing Shortage

The U.S. health insurance industry, referred to as Health Maintenance Organization (HMO), is leveraging technological innovation and pursuing mergers and acquisitions (M&A) to expand capabilities, enter new markets and broaden its member base. With the Federal Reserve implementing three interest rate cuts in 2025 and borrowing costs expected to remain relatively lower, insurers may find it easier to finance acquisitions, potentially supporting further industry consolidation. However, regulatory changes could tighten Medicaid eligibility and reduce ACA enrollment, affecting membership and reimbursements.

Medical expenses are rising due to the return of deferred care, increased chronic disease management and surging costs of specialty drugs like biologics and cancer therapies. Such rising costs are also weighing on companies across other industries of the broader Zacks Medical sector, such as Universal Health Services, Inc. UHS. Despite these hurdles, HMO companies like UnitedHealth Group Incorporated UNH, The Cigna Group CI, Humana Inc. HUM and Centene Corporation CNC appear well-placed to counter industry headwinds.

About the Industry

The Zacks HMO industry consists of entities (either private or public) that take care of subscribers’ basic and supplemental health services. Companies in this space primarily assume risks and assign premiums to health and medical insurance policies. Industry participants also provide administrative and managed-care services for self-funded insurance. Services are generally offered by a network of approved care providers (called in-network), which include primary care physicians, clinical facilities, hospitals and specialists. However, out-of-network exceptions are made during emergencies or when necessary. Health insurance plans can be availed through private purchases, social insurance or social welfare programs.

4 Trends Defining the HMO Industry's Future

Escalating Medical Expenses: Healthcare costs for U.S. health insurers are increasing due to several factors. The resumption of previously delayed medical procedures, along with greater demand for routine screenings and chronic disease management, has led to increased healthcare utilization and a rise in insurance claims. The growing use of expensive prescription drugs has also contributed to higher spending. In addition, demographic shifts, such as a rapidly aging population, are increasing demand for healthcare services. The rising prevalence of chronic diseases such as diabetes, obesity and cardiovascular conditions further adds to long-term treatment costs. As a result, the Health Benefit Ratio (a key measure of insurer profitability) has come under strain, leading to tighter profit margins.

Regulatory Hurdles: Health insurers in the domestic market are navigating a period of heightened regulatory uncertainty. The One Big Beautiful Bill Act aims to make significant changes to healthcare programs such as Medicaid, Medicare, and Affordable Care Act (ACA) marketplaces. The changes incorporate new Medicaid work requirements, stricter eligibility checks and reduced federal funding for some safety-net programs. The tighter eligibility and lack of subsidy extensions mean a drop in enrollment for insurers. Health insurers are under pressure, as lower Medicaid and Medicare reimbursements could strain already narrow margins. Because commercial insurance products generally generate higher margins than Medicaid or ACA plans, insurers are increasingly focusing on expanding their commercial offerings. Nevertheless, the expected Medicare Advantage rate increases in 2026 could offer some relief.

Scarcity of Healthcare Professionals: The ongoing nationwide shortage of nurses and other healthcare professionals continues to strain hospital operations, especially as patient volumes rise. An aging nursing workforce, increasing levels of burnout and an uneven distribution of healthcare staff across regions have collectively contributed to the shortage. HMOs work closely with hospitals, physicians and other healthcare providers to ensure their members receive efficient and cost-effective care. The consistency and quality of these services are crucial for maintaining customer satisfaction and encouraging the renewal of health plans. However, a declining nursing workforce may hinder hospitals’ ability to provide high-quality care, which can ultimately affect customer retention for HMO providers.

Strategic Emphasis on M&A: Alongside adopting technological innovations, HMOs often pursue mergers and acquisitions (M&A) to broaden their capabilities, enter new markets, strengthen their position in existing regions, expand their member base and enhance their nationwide presence. These strategic initiatives also support diversification, helping companies sustain a competitive advantage over peers. With the Federal Reserve implementing three interest rate cuts in 2025, chances remain of further rate hikes in 2026. This means that borrowing costs are expected to decline, which, in turn, is likely to fuel M&A activity as industry participants can access financing at lower costs.

Zacks Industry Rank Indicates Bearish Outlook

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all member stocks, indicates tepid near-term prospects. The Zacks Medical-HMOs industry is housed within the broader Zacks Medical sector. It currently carries a Zacks Industry Rank #224, which places it in the bottom 8% of 243 Zacks industries.

Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one. The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate.

Despite the dismal scenario, we will present a few stocks that one can retain, given their solid growth endeavors. But before that, it is worth looking at the industry’s recent stock-market performance and the valuation picture.

Industry Underperforms S&P 500, Sector

The Zacks Medical-HMO industry has declined 35.6% in the past year against the Zacks S&P 500 composite’s 24.4% growth. The Zacks Medical sector inched up 1.6% in the same time frame.

One-Year Price Performance

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Industry's Current Valuation

On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing medical stocks, the industry is trading at 13.71X compared with the S&P 500’s 22.01X and the sector’s 20.66X.

In the past five years, the industry has traded as high as 19.57X and as low as 11.58X, the median being 16.19X, as the chart below shows.

Forward 12-Month Price/Earnings (P/E) Ratio

Image Source: Zacks Investment Research

Image Source: Zacks Investment Research

4 Stocks to Watch

We present four stocks from the space with a current Zacks Rank #3 (Hold). Considering the present industry scenario, it might be prudent for investors to retain these stocks in their portfolios, as these are well-placed to generate growth in the long haul.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

UnitedHealth Group: Minnesota-based UnitedHealth Group’s revenue growth is supported by the strong performance of its UnitedHealthcare and Optum segments. The UnitedHealthcare division continues to benefit from enhanced Medicare and Medicaid offerings that combine affordability with appealing benefits, helping to expand its membership base and increase premium revenues. Optum’s expansion is driven by strategic acquisitions, the use of advanced technology and data-driven healthcare models.

The Zacks Consensus Estimate for UnitedHealth Group’s 2026 earnings is pegged at $17.70 per share, which implies 8.3% growth from the year-ago figure. UNH’s earnings beat estimates in two of the last four quarters and missed the mark twice, the average negative surprise being 2.38%.

Price & Consensus: UNH

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Cigna: Based in Connecticut, the company continues to thrive on the solid performance of its two growth platforms—Evernorth and Cigna Healthcare. Evernorth is strengthened by its extensive range of specialty pharmacy solutions, while Cigna Healthcare benefits from a wide customer base across its U.S. Government and U.S. Commercial divisions. The health insurer broadens its product portfolio and accelerates growth through strategic acquisitions and collaborations.

The Zacks Consensus Estimate for Cigna’s 2026 earnings is pegged at $30.29 per share, indicating 1.5% growth from the prior-year figure. CI’s earnings surpassed estimates in each of the last four quarters, the average surprise being 2.67%.

Price & Consensus: CI

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Humana: Headquartered in Kentucky, Humana has achieved consistent growth, supported by higher premium revenues and a strong membership base across its Medicare and Medicaid businesses. The solid performance of these plans has enabled the company to secure several new contracts and renew existing agreements with federal and state agencies. Through its CenterWell brand, Humana remains focused on addressing the healthcare needs of the country’s aging population. In addition, the company has undertaken strategic acquisitions, including Family Physicians Group, iCare and Inclusa.

The Zacks Consensus Estimate for Humana’s 2026 earnings is pegged at $9.82 per share. The consensus mark for 2026 revenues implies 22.8% growth from the 2025 figure. HUM’s earnings surpassed estimates in three of the last four quarters and missed the mark once, the average being 6.96%.

Price & Consensus: HUM

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Centene: Missouri-based Centene’s revenue growth is driven by strong performance in its Medicare and Medicaid businesses, contributing to increased contract wins and expanding membership. The ongoing inclination for Medicare Advantage plans among the aging U.S. population continues to fuel consistent demand for Centene’s Medicare offerings. The company pursues an inorganic growth strategy and enters into strategic acquisitions and partnerships with healthcare providers to broaden its capabilities, diversify its service portfolio and reinforce its presence across the country.

The Zacks Consensus Estimate for Centene’s 2026 earnings is pegged at $3.01 per share, which indicates a 44.7% rise from the year-ago figure. CNC’s earnings outpaced estimates in three of the last four quarters and missed the mark once, the average being 60.56%.

Price & Consensus: CNC

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UnitedHealth Group Incorporated (UNH): Free Stock Analysis Report

Universal Health Services, Inc. (UHS): Free Stock Analysis Report

Humana Inc. (HUM): Free Stock Analysis Report

Cigna Group (CI): Free Stock Analysis Report

Centene Corporation (CNC): Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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