A provision in the Affordable Care Act to expand Medicaid coverage has been adopted by 26 states, and more than 6 million people newly enrolled in the government backed health-care program over the past year. That's been a big boon to companies like Medicaid-focused WellCare Health Plans, Inc. (NYSE:WCG) and Molina (NYSE:MOH) because it earns billions of dollars a year running state Medicaid programs.
However, results at these niche insurers could be substantially better if more states choose to embrace Medicaid expansion. Currently, 24 states either continue to debate it, or outright oppose it.
Private option comes up short
A proportionately large number of non-expansion states are in the South, a region that arguably could benefit significantly from improving access to care given its proportion of low-income earners.
Although most of the southern states balked at expansion, Arkansas is one of six states that attempted to address the low-income uninsured by launching a private option Medicaid alternative.
It's likely other states that have yet to expand Medicaid have been watching the experiment in Arkansas closely; however, based on early results, it's doubtful many more states will embrace it.
Arkansas's private option alternative calls for the state to subsidize the purchase of plans on the public marketplace rather than covering newly eligible recipients through Medicaid itself. Ahead of implementation, the state expected the cost to insure each person on its plan would be $437 per month, but costs are running closer to $500 instead. That puts Arkansas on the hook for millions of dollars in over-running costs that aren't being reimbursed by Washington. Overall, Arkansas' private option has racked up more than $10 million in overages since January.
That's causing a political nightmare in Arkansas, where finger pointing is prompting backpedaling on the program. Eventually, Arkansas will most likely have to return hat-in-hand to Washington for help in covering the higher cost of its private-option alternative.
The failure of private-option Medicaid solutions could end up hurting insurers participating in exchanges that are benefiting from increased enrollment, but it may ultimately help increase membership for insurers that run state Medicaid programs.
Pressure to expand Medicaid remains in some states, and the private option, which had once been viewed as a more party-neutral choice, has quickly become less palatable. That could suggest that states that do end up eventually expanding may stick with Medicaid instead of this hybrid -- directly benefiting Medicaid-focused insurers like Molina and Wellcare Group, as both have significant presence in states that have not expanded Medicaid thus far. WellCare carries over 40% of its membership in non-expanding Florida and Georgia, and Molina has a substantial presence in Wisconsin, Utah, and Texas.
Profiting from expansion
While investors eagerly await insurers' second-quarter earnings to see whether marketplace plans are proving profitable, first-quarter results have already shown that Medicaid expansion has been a windfall.
Obamacare has had a huge impact for insurers like Molina that specialize in running state Medicaid programs. Expansion in California and Washington helped Molina's sales surge 21% year over year in the first quarter, thanks to 133,000 new members. And WellCare reported a 32% surge in revenue due in part to the expansion of Medicaid in states like Kentucky (although the acquisition of Windsor, which offers Medicare Advantage and prescription drug plans, also contributed nicely). If more states choose to expand Medicaid instead of doing the private Medicaid option, look for these niche insurers to benefit.
Fool-worthy final thoughts
Some states are adamantly against Medicaid reform. Others, like Pennsylvania, which is making its own private-option push, and Virginia, which is locked in a heated battle over expanding, could signal that the debate over expansion is far from over, particularly heading into elections.
Since many of the non-expansion states are seeing Medicaid enrollment climb anyway thanks to increased awareness, state costs are growing, and that could make those states more eager to receive Federal money. If so, Medicaid enrollment tailwinds are likely to continue to support membership and revenue growth at private insurers like WellCare and Molina. That suggests investors should continue to stay tuned to news coming out of non-expansion states.
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Todd Campbell owns shares of Molina Healthcare. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not own shares in the companies mentioned.The Motley Fool recommends UnitedHealth Group and WellPoint. The Motley Fool 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.