3 Health Insurance Stocks Poised to Surge

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For the past year, the Affordable Care Act (ACA), popularly known as Obamacare, has been a roller-coaster ride for insurers, providers, consumers and even federal and state governments. Although health insurance companies haven't made much money this year, many are looking ahead to 2015, when rate increases and expansion into other state marketplaces will beef up the bottom line.

The bad news: With myriad systems glitches and an unknown risk pool, health insurance companies have struggled to develop, price and offer new Obamacare-compliant plans, incurring significant costs to sell that new coverage in state or federal government exchanges.

Beyond the cost of regulatory compliance, health insurance companies had to design and price healthcare plans before they knew who would be buying them. Obamacare only works if there are enough young, healthy enrollees to offset older and sicker individuals - but no one knew what that subscriber mix would be. As it turned out, the enrollment of older patients with chronic (and expensive-to-treat) conditions has increased health insurers' cost of providing care.

The good news: With a year of Obamacare under their collective belt, health insurance companies have a better handle on how to price policies based on the mix of its risk pool. The average exchange-purchased premium across all states will rise 8.2%, according to a new study by PriceWaterhouseCoopers, but that reflects a wide divergence from state to state. Insurers participating in the Arizona exchange will cut existing rates by 23%, while plans in Arkansas will raise premiums by 50%.

Health insurance stocks have posted strong gains so far in 2014 - the Health Care SPDR ( XLV) is up 11% - but the entire sector has faced some headwinds with the rollout of Obamacare. Health insurance companies have experienced significant up-front costs as they geared up to compete in the new exchanges. Those costs should start to decline over the next two-to-three quarters.

However, some new headwinds, like citizenship verification for individuals who purchased a plan through an exchange, could open up Pandora's Box for the sector. Still, opportunities exist for these three health insurance stocks to surge in 2015: