Everything is Bigger in Texas...Including Medicaid

Medicaid enrollment has climbed by 80,000 in Texas despite the state opting out of Medicaid expansion.

Jul 20, 2014 at 1:00PM

Despite choosing not to embrace Medicaid expansion, more than 80,000 Texans have enrolled in the government program thanks to increased awareness following the launch of Obamacare exchanges launch last fall.

The jump in enrollment presents a problem for states like Texas that opted against bumping up eligibility because it increases the amount the state will spend on the program, but it's good news for Centene (NYSE:CNC) and Molina (NYSE:MOH), two companies that help run the state's Medicaid program.

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Source: Governor of Texas Flickr

First, a bit of background
Initially, the Affordable Care Act's Medicaid expansion provision effectively increased eligibility to 138% of the Federal poverty level nationwide, or roughly $33,000 for a family of four. For those that were found newly eligible, the Federal government agreed to pay 100% of the cost of care initially and no less than 90% of costs in the future, with the states picking up the rest.

However, the Supreme Court gave states the option not to expand their program in 2012 and as a result; just 26 states opted to increase coverage.

Even though a significant number of states didn't expand (including Texas), Medicaid has still proven widely successful at signing up new members nationwide.

According to the Centers for Medicare and Medicaid Services, more than 6 million people have enrolled in Medicaid since last summer, including 725,000 members in non-expansion states like Texas. That means that private Medicaid insurers that are running plans in states that didn't expand Medicaid are still getting a windfall.

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Source: Centene Corp.

Surging demand
Centene's biggest markets opted out of Medicaid expansion, including Texas, where Centene serves 900,000 members and Florida, where Centene serves 230,000 members.

But even though so much of Centene's business comes from these non-expansion states, Centene revenue is jumping.

The company serves nearly 2.9 million people who participate in government funded programs like Medicaid and CHIP, and a 13% jump in membership in the first quarter resulted in Centene's sales growing by a third to $3.46 billion in the first quarter.

Molina Healthcare's Medicaid business is humming too. Molina serves 2.1 million members including 246,000 in Texas, but it's less reliant on non-expansion states for growth. That's because Molina does a lot of business in California, a state that embraced expansion and has seen Medicaid applications soar.

In the first quarter, California accounted for 47,000 of Molina's 133,000 new Medicaid members and those new members helped Molina's revenue climb 21% to $2.1 billion.

Although Medicaid insurers like Centene and Molina have smaller margins than larger, more diversified insurers that serve commercial customers, rising revenue has both companies expecting to post significant earnings growth this year. Centene expects its EPS will reach between $3.60 and $3.90 this year, up from $2.87 last year, and Molina is guiding investors to expect EPS of between $4 and $4.50 this year, up from $3.13 in 2013.

Fool-worthy final thoughts
Kaiser estimates that as many as one million Medicaid applications nationwide have yet to be processed, so there's likely to be additional membership growth in the third quarter too.

But growth over the coming year won't just come from expansion states. Kaiser reports that roughly 875,000 Texans qualify for Medicaid but haven't yet signed up for the program.

Centene will release its second quarter results on July 22nd and Molina will update investors with its second quarter numbers on July 30th, so investors won't have to wait long to find out whether rising membership drove profits again last quarter, but given the numbers we're seeing out of states like Texas, it wouldn't surprise me if both companies posted solid results.

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Todd Campbell owns shares of Molina Healthcare and Centene Corp. 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 have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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