The Sunshine State has rained on Medicaid's expansion parade.
Republican Gov. Rick Scott last month reconsidered his opposition to the Affordable Care Act's Medicaid expansion. But the state legislature didn't agree and continues to consider other options -- such as a potential game changer that occurred last weekend.
Gov. Mike Beebe of Arkansas faced similar disapproval from his legislature. He went to the Department of Health and Human Services proposing that Arkansas purchase private insurance coverage for qualifying individuals using the Medicaid funds. To the surprise of many, HHS agreed with the plan.
If more states pursue similar deals, what will that mean for Medicaid expansion and private insurers?
Let's start with a quick rundown of what the expansion's trying to accomplish. Medicaid coverage currently varies from state to state but usually only includes a subset of the low-income population, such as single mothers or people with disabilities. The expansion will extend coverage to those who are under the age of 65 (the Medicare starting age) and who earn a minimum threshold of 133% of the federal poverty level.
But just how is this financed?
In the past, the federal government has covered an average of 60% of Medicaid costs by paying each state a "matching rate" based on its per-capita income. That method will continue for people who met the previous Medicaid qualifications. But for the newly eligible, the government plans to pick up the full tab for the first three years and decline gradually down to 90% afterwards. The expansion's success ultimately comes down to how, and to what extent, states participate.
According to The Advisory Board Company, 24 states have agreed to participate in the expansion, but that doesn't mean the decisions will make it past their legislatures. A dozen states haven't made a decision, though half of those at least leaning a certain direction. Fourteen states have said they won't take part in the expansion.
The possible state spending increases has been the most commonly touted argument against agreeing to the expansion. But Gov. Beebe's approach would allow hesitant leaders to have their cake and eat it, too; The same low-income individuals would still receive coverage, but the politicians get to say they took a tough stance against a government program that remains unpopular in some circles.
And the way the plans would be purchased could lead to enhanced profits for a top health care company.
The Affordable Care Act requires a link between Medicaid and the health insurance exchanges that will launch next year. The exchanges, abbreviated HIX, are designed to provide a convenient way to compare and apply for insurance plans.
The ACA encourages states to create their own HIX for residents, but it's not required. States can opt for a federally managed exchange. Private companies may also open exchanges, but must still abide by the government's criteria for the programs. And the private exchanges will likely cater to large groups or, if Gov. Beebe's plan succeeds, entire states.
And what companies stand to benefit from these changes?
Managed care behemoth WellPoint (NYSE:ANTM) straddled the fence between government backed Medicaid and the potential private HIX. WellPoint helped purchase exchange company Bloom in 2011 with the hopes of launching a nationwide HIX next year. The managed care behemoth then plunked down about $4 billion on Amerigroup to gain a solid Medicaid standing in 20 states ahead of the expansion.
A surge of new customers would also increase profits for pharmacy benefit manager Express Scripts (NASDAQ:ESRX), which counts WellPoint as one of its largest customers. Express Scripts makes deals between insurers and pharmacies. Government requirements mean HIX-purchased plans and Medicaid will both require prescription drug coverage. The symbiosis here is just one example of how these plans could spread the growth across the health care industry.
Foolish final thoughts
The obvious problem is that the exchanges don't exist yet, and no one knows exactly how this will all play out in the early days. There was a Feb. 15 deadline for states wanting the government's assistance in launching their own exchange at the beginning of next year. But there isn't a deadline for the opting into the expansion, so this process will play out slowly.
If Arkansas' plans make it through approval, that decision could chart the futures of several other states -- and the private companies they enlist.
Fool contributor Brandy Betz has no position in any stocks mentioned. The Motley Fool recommends Express Scripts and WellPoint. The Motley Fool owns shares of Express Scripts and 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.