The managed-health-care industry will be able to continue increasing profits in spite of restrictions placed on it by the U.S. health overhaul, even assuming margins deteriorate across all the major segments, Deutsche Bank said as it released a 360-page analysis and outlook.

Deutsche Bank's model for the industry anticipates premiums will grow by an average of 8% a year and operating earnings will increase 6.8% on average annually from 2011 through 2019, before capital deployment.

Managed-care-industry earnings per share should grow an average of 10% a year in that period, including capital deployment, according to the bank, which recently upgraded the sector to positive from neutral. Deutsche Bank expects commercial and Medicaid managed care to perform better financially than Medicare.

The industry and analysts expect lower earnings this year compared with 2010 as key features of the health-coverage law--notably new minimum medical-spending requirements for insurers--go into effect.

"Our model suggests that both the commercial and Medicaid sectors will have the potential to generate solid earnings growth over the next 10 years, although the outlook for Medicare managed-care is more constrained," Deutsche Bank analyst Scott Fidel said, suggesting that long-term investors should overweight their commercial and Medicaid exposure.

Key downside risks to Deutsche Bank's positive review include the possibility that the overhaul, passed last year and phasing in through 2014, could impair the industry's long-term earnings growth prospects, Deutsche Bank said.

Among other changes, the law sets new medical-spending minimums for the industry that could trim margins. Effective this year, the law requires commercial health plans to spend at least 80% or 85% of premium revenue on patient care, depending on the type of plan. Plans that don't meet the requirements could have to provide rebates to consumers starting in 2012.

State and federal regulators will be closely scrutinizing premium-rate increases and, this year, medical costs could accelerate more quickly than expected, Fidel noted. In addition, state budgets remain under pressure, which may pressure Medicaid managed-care margins, he said.

Deutsche Bank's picks are WellPoint Inc. (WLP), UnitedHealth Group Inc. (UNH), Cigna Corp. (CI), Aetna Inc. (AET), Amerigroup Corp. (AGP) and Magellan Health Services Inc. (MGLN).

Managed-care stocks were mixed and largely flat early Tuesday.

By Dinah Wisenberg Brin, Dow Jones Newswires; 215-656-8285; 
dinah.brin@dowjones.com
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