The Next Obamacare Domino to Fall

Initially intended for all states, Medicaid expansion became a state-by-state choice after the Supreme Court ruled in 2012 that including expansion in the Affordable Care Act was coercive because states didn't have enough time to voluntarily consent to the change, and states failing to enact it could lose their federal funding.

The Court's decision dented the ACA's auspicious goal to extend insurance coverage to tens of millions of uninsured Americans, but it didn't derail expansion altogether, and that's proven to be good news for insurers and their Medicaid business, including UnitedHealth Group (NYSE: UNH  ) , WellPoint (NYSE: ANTM  ) , and Molina Health (NYSE: MOH  ) .

Overall, 25 states chose to expand their Medicaid programs heading into 2014 and New Hampshire became the 26th state earlier this year. Last week, Pennsylvania became the 27th state, so let's learn more about the program's expansion and what it could mean for the insurance industry.

Source: State of Pennsylvania.

First, a bit of background
States aren't required to participate in Medicaid at all, but all 50 states do. The program was established in 1965 with the addition of Title XIX to the Social Security Act in a bid to offer health insurance coverage to low income Americans, and by 1972, every state had adopted it, except Arizona, which established a low-income program in 1982. As a result, 66 million Americans are covered by Medicaid or CHIP, the Children's Health Insurance Program, as of June.

Each state is responsible for its own Medicaid program, and eligibility requirements and benefits vary from state to state. As a result, the Medicaid experience can be quite different depending on where an enrollee lives. For example, a study conducted in 2007 by Public Citizen using Kaiser Family Foundation data found that Massachusetts offered the best Medicaid plan in terms of eligibility and coverage, and Mississippi offered the worst program.

Source: Dept. of Health and Human Services.

Moving the goal posts
The Affordable Care Act aims to decrease the uninsured population by more than 30 million by mandating that individuals purchase health care insurance, creating state insurance marketplaces that offer private health insurance plans, and expanding Medicaid income eligibility requirements to 133% (effectively 138%) of the poverty line.

The federal government picks up 100% of the cost of expanding Medicaid through 2016 and then gradually reduces its funding of expansion enrollees to 90% in 2020, where it remains for all subsequent years.

Since the Supreme Court's decision made Medicaid expansion opt-in, and just 27 states have adopted it, the level of uninsured is higher nationally than it would have been if all states had adopted it out of the gate. Regardless, more than 7 million people have signed up for Medicaid since healthcare exchanges opened last fall. States that expanded Medicaid have seen their enrollment jump an average 18.5%, and including non-expansion states, Medicaid membership is still up 12.4% nationwide.

That membership growth has proven a boon to healthcare insurers that run Medicaid programs for many states. In the second quarter, UnitedHealth Group reported that enrollment in Medicaid plans it runs climbed 19%, or by 730,000 people, to 4.67 million members in the past year. WellPoint saw enrollment in its Medicaid plans increase by 8.4% to 4.8 million people, and Molina added 230,000 new members to its Medicaid plans over the past year.

That's led to big revenue growth for these insurers. UnitedHealth's Community and State business sales grew 29% year over year to $5.8 billion in the second quarter. Second quarter sales for WellPoint's Government Business segment, which also includes Medicare, grew 7.4% to $8.26 billion. And Medicaid expansion helped lift Molina's sales by 44% in the past year to $2.3 billion.

Source: State of Pennsylvania.

Jumping on the bandwagon
Pennsylvania's decision to adopt Medicaid reform comes after significant legislative effort to create an alternative model that uses federal funding to buy private insurance for 500,000 low income residents starting next year.

Pennsylvania's plan is similar to Arkansas' and Iowa's plans, which also use Federal funds to buy private insurance for low-income residents. But it differs from those two state plans because it buys that private insurance outside of the ACA's marketplaces. 

Pennsylvania's plan also differs from traditional Medicaid expansion because it requires those earning 100% or more of the poverty level to kick in 2% of the cost of their monthly premium beginning in 2016. Pennsylvania had previously lobbied for a plan that would require premiums from those earning 50% or more of the poverty level, but federal watchdogs balked.

Fool-worthy final thoughts
More than 2.4 million people are already enrolled in Medicaid in Pennsylvania as of June, up 17,000 from the third quarter of 2013. That means that the addition of 500,000 new enrollees may boost low-income insurance coverage in the state by more than 20% in the coming year.

Additional states may join Pennsylvania in expanding Medicaid given that overall enrollment in non-expansion states is on the rise, too. According to the Department of Health and Human Services, Medicaid enrollment grew 4%, or by nearly 1 million people, in non-expansion states since last fall. Those additional enrollees will pressure state budgets given that they won't qualify for federal Medicaid expansion funds. That may suggest that the threat of an increasingly unfunded membership lures additional states to expand. Time will tell.

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Read/Post Comments (12) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 31, 2014, at 11:13 AM, dusty10x wrote:

    Adding millions more to receive free medicaid or almost free healthcare paid by the taxpayers...It all comes from the general tax funds....Listen to the politicians wail about some "other reasons" all our regular spending needed for roads, schools, etc are ALL underfunded now....

  • Report this Comment On August 31, 2014, at 11:21 AM, Jim8 wrote:

    I'm a big critic of high deductible health care. There has been studies about how we use high deductible, we us it less.

    This might be good thing if the goal is to have people go to the doctor less often.

    The reality os that you are less likely to take your kid to the emergency room if he hits his head, or you suspect you have chest pains, becuase these most likely are nothing and that money was hard to save, or worse yet, expensive to borrow.

    The poor get the kind of medical care the rest of us deserve. It's best to strive to be poor today.

  • Report this Comment On August 31, 2014, at 12:04 PM, svede wrote:

    That the Motley Fool gleefully reports on the ACA all the time makes me question any advice they give. We have a Federal government that is woefully in debt that has added another layer of entitlements to the mess. If they had any integrity they would encourage everyone to max out all of their credit cars and live like real fools.

  • Report this Comment On August 31, 2014, at 12:20 PM, wfo75080 wrote:

    Anytime you have someone giving advice (opinion) and the end result is wanting you to pay for it, makes me skeptical.

    Giving healthcare to 30 million for free (the poor) which are typically very unhealthy, and making the other 200 million to pay for it is nothing short of socialism. My taxes have gone up in almost every area. There is a reason people keep trying to find ways to get out of paying taxes.

  • Report this Comment On August 31, 2014, at 12:38 PM, slanciano wrote:

    Ever wonder what's really in store for you involving Obozocare ? Bring up this Youtube portal page and type in the following search criteria:

    Know the TRUTH about the Government Health Care Bill

    Click search - then click on one video icons on the left margin

    This is video reading of the law word for word. No propaganda just the facts.

    This ends today's lesson

  • Report this Comment On August 31, 2014, at 1:02 PM, SSBN620 wrote:

    Why is Motley Fool such a big fan of Obamacare? Because O'care is corporatism, designed to force the dwindling middle class to pay more (for less) to the big insurance companies. Great for profits and stock prices, but all at the expense of the average non-stock owning working American. It could not be more morally wrong. and I, for one, refuse to invest that way. It's all about greed, and MF should be ashamed of themselves.

  • Report this Comment On August 31, 2014, at 4:08 PM, SLTom992 wrote:

    You have to pay close attention to Jim. The fact is that buying Obama-care sets your deductibles so high that few people will exercise their insurance rights under this policy As noted the ONLY people that gain any advantage are the poor people who aren't going to use it anyway because most of them are illegals and will be marked.

  • Report this Comment On August 31, 2014, at 5:01 PM, Petefus wrote:

    And when the federal government cuts back on its funding to the state, the state tax payers will end up footing the bill. How foolish! It looks like a good deal now, but when state income taxes, and other new taxes, are raised to fund obamacare Medicaid users, people will have a fit. How much more in taxes does the government politicians think we can afford? This stinks!

  • Report this Comment On August 31, 2014, at 5:12 PM, linmarman wrote:

    I haven't read many articles about Obamacare on TMF. I hope this doesn't indicate a one-sided bias of all members. Several comments talk about 'free healthcare' for the poor. Many of the poor were going to get free healthcare anyway, but would have just waited (and suffered) until it was unbearable. A humanitarian would like the poor to be treated for simple ailments before they cause grief and suffering, but it must be a good deal for tax payers too. Treating an infection in a doctors office must be what - 1000 times cheaper than in emergency room. Plus, when YOU need the emergency room, you may just get seen in less than eight hours.

  • Report this Comment On September 01, 2014, at 8:38 AM, Georgewdunce wrote:

    Motley Fools would let MORONS and RACISTS insult the President of the United States on this forum, but will be quick to delete any dissenting opinion on their article.

    I always read set up headlines on Motley Fool inviting stupid remarks by stupid people, like, "The Next Obamacare Domino to Fall"

    Motley Fools have made a lot of money from Obama care and I am still waiting to read anything positive from them about Obama care. Oh, wait a Minute, IDIOT REPUBLICAN'TS write most of Motley Fools worthless Articles.

  • Report this Comment On September 02, 2014, at 8:03 AM, chrisxasos wrote:

    Apparently, some who comment here only read the headlines. The article was actually somewhat favorable towards the ACA, written by a guy in the healthcare field - Not that there's anything right with that...

  • Report this Comment On September 02, 2014, at 1:41 PM, conmaggot wrote:

    Expanding Medicare saves money. You pay top dollar for the uninsured. Just because there wasn't a separate bill on the table never meant you didn't pick up the tab.

    Too many people here are ignorant of the impact of Obamacare, and it's not even fully implemented yet.

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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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