2 Ferns Controversy = Obamacare Success?

United Healthcare (UNH) and Aetna (AET) may benefit from the administration's push to sign up millennials.

Mar 19, 2014 at 5:47PM

The administration reported 800,000 more people signed up for coverage through health-care exchanges so far this month, bringing the total of newly enrolled to 5 million. Despite the surge heading into the final two weeks, the administration is unlikely to hit its pre-launch target of signing up 7 million uninsured Americans in the program's first year.

However, the spike in enrollees this month could prove welcome news for insurers including United Healthcare (NYSE:UNH) and Aetna (NYSE:AET) that are participating in the public exchanges. So far, those insurers have likely been unimpressed by the number of young people signing up for coverage. But that may have changed this month following the President's wide-ranging marketing push that included a visit with Zach Galifianakis on his web show Between Two Ferns.

Winning the younger demographic's attention
President Obama's Between Two Ferns visit clogged Facebook and Twitter feeds, making it one of the most successful pitches to young people so far. The administration reports that in the first 24 hours after airing, the show was the biggest source of new visits to the healthcare.gov website, causing web traffic to the site jump 40% on the first day it aired.

As a result, it may not be a stretch to assume that a good portion of those signing up for coverage last week were in those younger age cohorts. United and Aetna would like that to be the case. Exiting February, only about 10% of the approximately 11 million potential enrollees between 18 and 34 years old have signed up for coverage.

If plans offered by United and Aetna through the exchanges are to be as profitable as intended, they'll need that number to be higher. After all, a larger percentage of healthy, young patients would go a long way to offsetting costs tied to caring for older patients, some of whom had previously been denied coverage due to pre-existing conditions.

Assuming that the surge heading into the deadline for coverage is skewed toward younger people, United and Aetna could see the benefit of their enrollment show up in future medical loss ratios, or MLRs. Those MLRs reflect how much of the premiums insurers collect are paid back out in the form of patient care.

Stalling profit this year?
Diversified large insurers like United and WellPoint (NYSE:ANTM) have approached 2014 cautiously. Both companies have been guiding investors to expect profit to stall this year.

United is guiding for earnings of $5.40 to $5.60 per share in 2014, about even with the $5.50 it made in 2013, and WellPoint expects earnings to be above $8, but that would mean it could end up shy of the $8.20 it earned last year. 

A major source of their concern is likely centered on their inability to accurately model for the composition of enrollees in the Obamacare plans. If the average age of the newly insured is higher than initially modeled, MLRs may be high. If the average age is lower than predicted, the MLR may come in below plan. For investors, the latter would be more welcome given that a lower MLR would provide insurers with a better shot at over-delivering on their tepid profit forecast.

Fool-worthy final thoughts
The most recently released data didn't provide a break out of enrollment by age. So investors will have to wait to see whether new members tilted away from boomers to millennials.

Coming out of February, the trend was clearly improving. The percentage of enrollees aged less than 35 was shy of 25% through early December. That put it substantially below the 38% to 40% hoped for by the administration early on. But that percentage improved to 27% by the end of February.

Since the percentage of young enrollees may have an important impact on United's and Aetna's earnings this year, investors should keep an eye out for the final enrollment numbers. Investors may have been modeling for young enrollees accounting for 25% of the total based on the first few months. If so, a final reading above those levels could be welcome news. Regardless, investors will need to keep an eye on MLR over the next few quarters to see just how big an impact Obamacare is having on their bottom line.

What two ferns didn't tell you about Obamacare
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Todd Campbell has no position in any stocks mentioned. He owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd also owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned.

The Motley Fool recommends UnitedHealth Group. It recommends and owns shares of WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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