Medicaid/Medicare Show Path to Profits for Healthcare Providers

by Jason Jenkins

Many experts, analysts and pundits are trying to take on the massive task of summarizing the entire Supreme Court’s decision on the Affordable Care Act in about 500 words or less.

This approach doesn’t work. In our evolving 24/7 news cycle, it’s a necessity to churn something out even if it isn’t fully vetted. Most knee-jerk reactions were a response to which side of the fence you practiced and preached your politics. Either Obamacare will bring healthcare to the downtrodden in this country or it’s the beginning of the European socialist revolution.

It’s neither. It’s just the law of the land at the moment. Our country’s history is fraught with laws passed that were thought to be the spark of the Apocalypse. Laws have come and gone and we are still here. Now those who take the practical approach to a changing political backdrop are those who in the end profit from those changes. Healthcare reform is here. What we need to do is look at it as it all comes to light and a better understanding, and then act accordingly.

A few days ago, I wrote a piece on the new investment tax that’s derived from this legislation. Depending on your income and investment structures, you may need to protect your assets. Now, I see another aspect of the law that will have a profound effect on the healthcare industry and may provide investment opportunities going forward.

How the ACA Affects the Medicaid/Medicare Businesses

As we know, the individual mandate was ruled constitutional. However, the Court did limit Medicaid expansion by limiting the federal government’s power to put an end to states’ funding.

The court also ruled that the federal government can’t punish states that don’t comply with the Affordable Care Act’s purpose of expanding Medicaid coverage. So there will be no withholding of funds to those Red States who oppose the law down to the core of their Governor’s souls (insert Rick Scott and Rick Perry). States have the ability to expand coverage, but they can’t be forced to.

Why does this matter? It shakes up the landscape of the industry, which the markets have shown since day one of the ruling. It’s a negative for major health insurance companies, but a positive for Medicaid companies.

Private Sector Growth in Healthcare Will Get Worse

Here’s the situation with the major managed care health providers – such as UnitedHealth (NYSE: UNH), WellPoint (NYSE: WLP), Aetna (NYSE: AET), Cigna (NYSE: CI) and Humana (NYSE: HUM). When you look at their quarterly earnings reports, you see all the growth is coming from public programs like Medicare and Medicaid. The private sector business is lagging and not seen as very profitable any more.

Many people thought healthcare reform would be a boom to the entire industry. However, when you actually look at the law, that assumption proves not to be true. Even though an individual mandate brings in millions of new users, insurers will have a hard time expanding their bottom lines.

Look at what they will no longer be able to do:

  • No longer will an insurer be able to deny coverage to citizens because they have pre-existing conditions.
  • Insurers will be required to spend at least 80% of patients’ premiums on medical care. If they do not, the law requires them to send rebate checks to those people.
  • The majority of insurers spend a lot more than 20% on administrative expenses, which will cause some serious belt-tightening in regards to expensing.
  • The law will make it very difficult for insurers to frivolously raise prices.

Upholding “Obamacare” means that there is now an earnings cap on this sector. This, however, doesn’t mean that the industry is done.

Where’s the Growth?

Before the ruling, the managed care heavyweights saw all their growth coming from the public sector. Let’s take a look at the numbers of the two biggest players in the market.

UnitedHealth and WellPoint each claim around 34 million members and have now become major players in Medicare by means of their Medicare Advantage and Medicare supplement plans, and Medicaid. Last year, UnitedHealth's public sector membership went up nearly 7% in contrast to their private sector membership, which increased a little over 4%.

WellPoint's growth in the public sector one-upped them. Their Medicare enrollment was up around 17% in 2011while Medicaid enrollment grew 6.3%.

Insurers specializing in Medicaid plans for low-income persons and families, such as Amerigroup (NYSE: AGP) and Molina Healthcare Inc. (NYSE: MOH), have gained the most. This is due mainly to the expansion of Medicaid eligibility in the states.

And as soon as the ruling was announced, Medicaid companies saw a relief rally because Chief Justice Roberts stated that the federal government’s ability to cut funding for Medicaid programs was limited by the law.

Where Does the Industry Go From Here?

One word sums up what’s likely on the way for the healthcare insurance industry: “consolidation.” On July 9, WellPoint said it would buy Amerigroup for $4.9 billion. That deal has been the catalyst for a whole lot of speculation concerning the other managed care heavyweights like Humana, Cigna, Aetna and UnitedHealth, that they’re now in the market for other Medicaid/Medicare providers due to the ACA ruling.

WellPoint's deal came at a 43% premium. However, it’ll give the provider 4.5 million new state-sponsored healthcare accounts, and also contribute some dual eligible managed care customers. The move will add to WellPoint’s 65 million-plus healthcare customers.

Who’s next? Look for the likes of other Medicaid/Medicare providers like Molina Healthcare, Centene (NYSE: CNC) and WellCare (NYSE: WCG) to be considered as possible purchasing targets. As of last week, these equities were up over 15% on rumors that they’re next on the list to be bought.

The big boys now see where the market is headed and are looking to buy them a piece of the pie.

Good Investing,

Jason

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