Will investors viewing Obamacare as a boon for health insurers regret their enthusiasm? Only time will tell if the law pays off for these companies, but recent developments suggest that some of health reform's purported benefits could be smaller than expected.
In the summer of 2012, the Supreme Court of the United States upheld the Affordable Care Act, with the only limitation being that states would reserve final say on whether to expand their Medicaid programs. But with the federal government committed to paying for the initial Medicaid expansion, it was clear at the time that most states would take advantage of the chance to expand coverage at no incremental cost. So, with the law upheld and set to take effect in 2014, insurance companies began planning their strategy to capitalize on a wave of newly insured Americans.
In a little over a month, two multibillion-dollar deals were announced. WellPoint (NYSE:ANTM) announced the acquisition of Amerigroup in June, and Aetna followed up in July with news that it was acquiring Coventry Health Care. Both targets were seen as particularly attractive due to their large Medicaid and Medicare businesses, certain to grow because of Obamacare's Medicaid expansion and an ever-growing population of senior citizens.
About that expansion...
Despite the "free" federal money backing Medicaid's expansion to 138% of the federal poverty level, not as many states as you might think are planning to take advantage. According to a report from The Advisory Board Company, as of the beginning of March more than half of states are either undecided on or against expanding the insurance program. While there is still plenty of time to play political hardball before 2014 hits, recent developments should have Medicaid-heavy insurers like WellCare (NYSE:WCG), Molina Health (NYSE:MOH), and Centene (NYSE:CNC) at least a little concerned.
One recent example of the uncertain future for Medicaid-focused insurers comes from Arkansas. With MacGyver-like creativity, Arkansas Gov. Mike Beebe, a Democrat, appears to have pulled off an unlikely plan to expand its Medicaid program while appeasing its Republican-controlled state legislature. Instead of its existing Medicaid program covering the new members upon expansion, they'll be sent to one of Obamacare's new creations, a state insurance exchange, to obtain a policy.
Why could this be bad for Medicaid players? It's pretty simple -- instead of picking up their fair share of these members through the state program, they'll be forced to compete against commercial insurers like UnitedHealth (NYSE:UNH) that they probably weren't competing with in the Medicaid market.
Foolish bottom line
For now, the Arkansas plan is unique to that state. However, it's safe to assume that other politicians are taking notice, and might look to broker a similar deal with the Obama administration. If you're holding shares in a smaller insurer, it's probably time to read through an annual report and understand the specific states that your company is exposed to and what the implications of different Medicaid expansion decisions might be.
Brenton Flynn has no position in any stocks 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.