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Earnings Roundup: Aetna, Inc. Continues the Medicaid Winning Steak

The Centers for Medicare and Medicaid Services report that more than 3 million people enrolled in Medicaid following Obamacare's launch last fall. That jump came despite many states opting out of expanding coverage to include those earning up to 138% of the Federal poverty line, or about $33,000 for a family of four.

So far, Medicaid expansion in the 26 states choosing to adopt it has proven a boon to insurers that administer Medicaid plans. United Healthcare (NYSE: UNH  ) was the first to report a big jump in Medicaid revenue during the first quarter and last week Centene (NYSE: CNC  ) , an insurer specializing in such plans, similarly noted a spike in revenue last quarter.

The latest to benefit from the expanding Medicaid rolls is Aetna (NYSE: AET  ) . Aetna reported that membership in its health insurance plans increased by more than 500,000 people between the end of the fourth quarter and the end of the first quarter. The company also reported that Medicaid membership jumped from 1.1 million people in the first quarter of 2013 to just shy of 2 million people at the end of March.

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Medicaid's profit boom
Specialty insurers like Centene are more directly exposed to the benefit of Medicaid expansion given Medicaid represents the majority of the company's members. Centene reported that its revenue jumped by a third to over $3.3 billion last quarter.

But that doesn't mean that the big diversified insurers don't benefit from it too. In the first quarter, United Healthcare's Medicaid revenue grew by 17% to $5.2 billion as Medicaid enrollment in plans it runs grew by 255,000. That helped lift United's overall revenue by 5%, to $31.7 billion in the quarter.

Over at Aetna, the addition of more than 800,000 Medicaid members in the past year thanks to the company's acquisition of Coventry Health last May, and Medicaid expansion helped lift premiums collected from Government programs -- including Medicaid and Medicare Advantage -- to $5.1 billion in the quarter, up from $2.6 billion a year ago.

Importantly, the medical benefit ratio, or MBR (or the percent of premiums paid out in medical costs) for people enrolled in Medicaid and Medicare plans fell in the quarter from 88% of premiums collected to 84.7%. That helped Aetna's overall operating income climb from $513 million first quarter of last year to $719 million in the first quarter.

The bump up in Medicaid contributed to Aetna's total operating revenue growing 47% to $14 billion. And the increase in profit-friendly cash flow allowed Aetna to funnel more than $500 million back to investors during the quarter in the form of share buybacks and dividend payments.

However, it wasn't just Medicaid membership that drove Aetna's results higher. The company also posted solid growth in its commercial plans.

Enrollment in Aetna's commercial insurance plans grew from 18.8 million exiting the fourth quarter to 19.2 million at the end of March. For comparison, enrollment in such commercial plans was just 16.2 million a year ago.

Much like with its Medicaid plans, the MBR for its commercial members fell too. Aetna spent a bit more than 77% of its commercial premium revenue on care during the quarter, down from nearly 79% in the first quarter of 2013.

Fool-worthy final thoughts
The benefits of higher enrollment are expected to continue through this year, giving Aetna confidence enough to boost its full year sales and earnings forecast. Aetna expects revenue to total between $56 billion and $57 billion this year, up from its prior guidance for at least $54 billion. Earnings per share estimates were also lifted by $0.30 per share at the top end of its range to between $6.35 and $6.55.

Granted, Medicaid's expansion will have a more dramatic impact on specialty companies like Centene than on Aetna and United. Centene predicts its sales will jump to $14.2 billion to $14.8 billion, producing EPS of between $3.60 to $3.90 this year. That would be significantly better than the $10.5 billion in sales and $2.95 in EPS it reported last year. For comparison, United's latest EPS forecast of between $5.40 to $5.60 this year is essentially in line with what it earned last year. 

Unlike United, Aetna's earnings projection would outpace the $5.85 it earned in 2013. Given total enrollment is expected to finish the year up by more than 800,000 people, it would seem there's plenty for investors to like about Aetna this year.

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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.

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