Why the Obamacare Profit Surge Isn't Over Yet

One of the crucial areas where the Affordable Care Act, better known as Obamacare, has driven profitability for insurers has been through the expansion of Medicaid, which the majority of states have implemented. Those millions of new people on the company rolls have helped drive revenue across the industry. And more may be yet to come.

Insurers Molina Healthcare (NYSE: MOH  ) , UnitedHealth  (NYSE: UNH  ) , and Aetna's (NYSE: AET  ) Coventry Health may all see sales growth tied to the Affordable Care Act's Medicaid expansion this year as California digests a big backlog of enrollees and Michigan's newly launched expansion kicks in.

Molina is a major provider of Medicaid services in California, and all three companies provide private Medicaid insurance in Michigan, where the enrollment expansion began on April 1. 

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Mining members in the Golden State
California's decision to focus the bulk of its attention on processing private insurance applications through its state exchange has created a traffic jam of initial requests for Medicaid insurance.

Even after signing up nearly 2 million new members, California entered May with more than 900,000 pending Medicaid applications. Those are quickly being addressed following the end of private insurance open enrollment in March.

While not everyone who applied for Medi-Cal will qualify and end up covered by Medicaid, the backlog should still mean thousands of additional Medicaid members and millions in new revenue for Molina.

California already accounts for more than 20% of Molina's Medicaid members, and the expansion is already contributing significantly to company sales this year. In the first quarter, Molina's revenue soared 21% to $2.1 billion --  thanks in no small part to California enrollees, who accounted for 47,000 of Molina's 133,000 new Medicaid members.

Driving membership growth in Michigan
Since beginning on April 1, Michigan reports signing up more than 230,000 new Medicaid members. That puts it more than halfway toward its goal of registering more than 450,000 people through the expansion.

Since Molina gets paid based on the number of people enrolled in the state's Medicaid program, that membership surge is likely to be a boon starting in the second quarter. As of March, Molina already provides Medicaid insurance to more than 218,000 Michigan residents, representing about 10% of the company's overall Medicaid enrollment. 

Michigan's enrollment growth will also boost revenue for UnitedHealth, an insurer that is also already enjoying tailwinds tied to Medicaid expansion. The addition of more than 250,000 new program members helped sales in the company's community and state segment jump 17% from a year ago to $5.2 billion in the first quarter.

Molina and UnitedHealth are likely to see the greatest benefit from Michigan's expansion because their plans are available in most counties, but Aetna's Coventry segment should also see growth.

Aetna spent $5.7 billion to acquire Coventry last year in a bid to increase its exposure to Medicaid ahead of expansion. That decision, coupled with Medicaid expansion in states served by Coventry, helped Aetna's Medicaid membership soar by more than 800,000 in the past year, and translated into a near-doubling in sales for Aetna's government programs business to $5.1 billion in the first quarter.

Fool-worthy final thoughts
Ongoing enrollment growth in key markets such as California and Michigan should offer revenue support for Molina, UnitedHealth, and Aetna this year, but that growth comes with a headwind.

Medicaid recipients are more expensive to serve and deliver thinner profit margins for insurers than customers in other programs. Those thin margins will be pressured even more this year in the wake of the launch of stunningly high priced medicines such as Gilead's $1,000 per pill hepatitis C drug Sovaldi. After receiving approval in December, Sovaldi racked up more than $2 billion in sales during the first quarter, prompting an outcry from insurers.

Regardless, Molina still thinks it can deliver earnings per share of between $4 and $4.50 this year, up more than 35% from 2013. UnitedHealth estimates its earnings will be roughly flat this year versus last year, while Aetna is guiding investors to expect earnings per share between $6.35 and $6.55, up from $5.85 last year. That suggests investors should read second-quarter earnings releases closely to see if membership growth and higher costs-of-care cause estimates to head higher or lower.

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