Obamacare Can't Cure WellCare's Ills, Boosts Health Net

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

The seismic shift in health care insurance known as the Affordable Care Act is sending shock waves through health care insurers this year. While enrollment in private insurance plans has been lackluster since the federal health exchange launched last fall, Medicaid has enrolled 6 million members -- at least a million of whom were newly qualified under Obamacare.

Typically, such membership growth would be a boon to private firms tasked with running state Medicaid plans, but in the case of WellCare (NYSE: WCG  ) the added patient pool did little to help the company's fourth quarter results or guidance for 2014. WellCare's disappointing quarter and lackluster guidance contrasts results from Health Net (NYSE: HNT  ) , a Medicaid competitor enjoying a big year-over-year bump in fourth quarter income.

Jumping member rolls
WellCare provides Medicaid in nine states, including a recent launch in New Jersey, and the company's Medicaid membership grew 11% to 1.8 million people in the fourth quarter. This growth came despite the company's exit from Ohio, a move that was more than offset by rising Medicaid enrollment in Kentucky and Florida, and acquisitions in Missouri and South Carolina. Health Net also saw its Medicaid member count improve by 3% to 1.1 million members at the end of December -- including 300,000 thanks to reform in the fourth quarter alone.

WellCare's membership growth pushed Medicaid revenue up 24% to $1.5 billion in the fourth quarter. Importantly, the medical benefit ratio (MBR), or the percentage of premiums paid out for care, for those Medicaid patients declined slightly, falling 0.3% in the quarter to 88.4%. Health Net Medicaid revenue grew 10% to $597 million, but the company spent just 83% of its Medicaid premiums on patient care in the fourth quarter of 2013.

So, what went wrong at WellCare?
WellCare has had its share of stumbles over the past few years, including an expensive $138 million legal settlement in 2012 tied to allegations of Medicare and Medicaid fraud. As a result, the company is restructuring to ex-out costs and boost profit.

Unfortunately, those cost-saving moves may not be happening fast enough for analysts. Non-GAAP net income per share totaled just $1.09 in the fourth quarter, down from $1.32 in the fourth quarter of 2012. Industry analysts were modeling for $1.15 per share. WellCare's full year EPS also fell, dropping to $4.63 from $4.92 in 2012. Meanwhile, Health Net's EPS came in at $0.25 in Q4, up from $0.07, and its full year EPS totaled $2.12, up from $1.47 last year.

Higher medical care costs for Medicare Advantage at WellCare, a business that covers 290,000 members, is one reason behind the company's poor performance. The percentage of money WellCare spent caring for those members increased to 88% from just shy of 87% last year, largely offsetting the slight improvement in Medicaid costs. WellCare's results also suffered from a higher effective tax rate and higher interest expense tied to a $600 million 5.75% rate bond offering last fall.

However, what appears to really have surprised Wall Street is WellCare's forecast that fees tied to Obamacare will reduce earnings by $1.17 to $1.26 in 2014. As a result, the company is guiding for earnings per share of between $3.75 and $4.05 this year -- far below analysts' projections for $5.06.

Despite similarly facing increased costs tied to Obamcare, guidance is far rosier at Health Net. Thanks to an anticipated 42% leap in Medicaid enrollment, the company expects EPS of at least $3 per share this year, up from $2.12 in 2013.

Fool-worthy final thoughts
Despite the poor profit outlook at WellCare, it's not all bad news. Reform-driven enrollment and expansion in states like New Jersey are expected to lift the company's Medicaid premium revenue by 22% to 23% in 2014. However, WellCare has a lot of work ahead if it hopes to over-deliver on its anemic earnings outlook. 

Health Net's prospects appear far brighter. The company expects 600,000 new members thanks to reform, and that has it guiding for 30% higher sales this year.Given Health Net's forecast for profit growth, it appears the company is better positioned to translate reform-driven membership growth into shareholder-friendly profit in 2014.

Health Net may have a great 2014, but it will have trouble keeping up with this stock
There’s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2839687, ~/Articles/ArticleHandler.aspx, 9/1/2015 6:24:17 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Todd Campbell

Todd has been helping buy side portfolio managers as an independent researcher for over a decade. In 2003, Todd founded E.B. Capital Markets, LLC, a research firm providing action oriented ideas to professional investors. Todd has provided insight to a variety of publications, including SmartMoney, Barron's, and CNN/fn.

Today's Market

updated Moments ago Sponsored by:
DOW 16,058.35 -469.68 -2.84%
S&P 500 1,913.85 -58.33 -2.96%
NASD 4,636.11 -140.40 -2.94%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/1/2015 4:03 PM
WCG $87.59 Down -3.08 -3.40%
WellCare Health Pl… CAPS Rating: ****
HNT $62.47 Down -1.59 -2.48%
Health Net, Inc. CAPS Rating: *****