Surging Medicaid = Insurer Earnings Surprise?

We'll soon know whether private plans offered through health-care exchanges were profit friendly in the second quarter, but we already know that Medicaid expansion has been a boon to the industry.

Medicaid revenue was one of the brightest spots in UnitedHealth Group (NYSE: UNH  ) and Aetna's (NYSE: AET  ) first-quarter results, and surging enrollment drove share prices for specialty Medicaid providers including Molina (NYSE: MOH  ) and Centene (NYSE: CNC  ) to new highs over the past few months.

Source: Aetna.

Big and getting bigger
The Centers for Medicare and Medicaid report that 6 million people have signed up for Medicaid coverage since October, marking roughly 10% growth since the Affordable Care Act's launch.

Driving that increase is both an increase in eligibility and an increase in awareness. The ACA boosts income limits on Medicaid eligibility to 138% of the poverty levels in states adopting the provision, and widespread marketing of the program has resulted in the enrollment of millions of people who were previously unaware that they qualified for the program.

Driving first-quarter growth
At UnitedHealth, expansion in states served by the company helped revenue in its Community and State segment to jump 17% year over year, to $5.2 billion, as UnitedHealth added 255,000 new Medicaid members to its rolls.

At Aetna, rising enrollment and the impact of its $5.7 billion acquisition of Medicaid insurer Coventry last year added 800,000 new Medicaid members to its programs, nearly doubling Aetna's revenue from government programs to $5.1 billion in the first quarter.

Results at smaller, less-diversified insurers were even better.

At Molina, sales jumped 21% to $2.1 billion thanks to signing up 133,000 new Medicaid members in the first quarter, and Centene's revenue climbed by a third to over $3.3 billion as it covered 218,000 more people under Medicaid.

Source: Author's calculations

Carrying over into Q2
Medicaid insurers should post similarly strong results for the second quarter, given that there were significant application backlogs exiting the first quarter.

More than 1 million applicants were still awaiting word on whether they qualified for the program in California in May, and the sheer number of people still waiting for responses prompted the CMS to issue letters last month to 12 states calling for them to submit proposals on how they plan to clear their desks.

The half-dozen states receiving the letter from the CMS include California and Michigan, two heavily populated states that have made big pushes to get people to sign up for the program. In California, more than 600,000 applications were still unprocessed as of last week, and in Michigan, more than 323,000 people have signed up for Medicaid coverage in the past 14 weeks.

That suggests that providers serving those states should see an outsize benefit from second-quarter enrollment, including Molina. California is Molina's biggest market, accounting for more than 47,000 of its new Medicaid signups in Q1, and Molina served more than 218,000 people in Michigan as of March.

Kansas also received a letter from the CMS regarding its backlog, which could benefit Centene, which covers more than 145,000 people there. Centene also covers 58,000 in Missouri, another state that got the CMS letter, and has more than 118,000 members in California -- a market it recently entered.

Fool-worthy final thoughts
There's little question that Medicaid revenue will grow at these companies, given that state contracts pay insurers based on the total number of people enrolled. A bigger question, however, remains how profit-friendly these new members will be.

Medicaid members are typically more expensive for insurers, since more of the total premiums collected covering them are spent on care than for commercial members and newly launched expensive drugs like Gilead's Sovaldi could weigh on already thin margins. However, those risks aren't lost on the management of these companies, and so far they remain undaunted. Exiting the first quarter, for example, Molina is guiding for adjusted earnings per share of between $4 and $4.50 per share this year, up from $3.13 in 2013.

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