Are shares of Rite Aid (NYSE:RAD)a gift that could keep on giving?
Rite Aid this week reached a nearly $3 million settlement in a case brought by the U.S. Justice Department. The government alleged that the pharmacy chain violated the False Claims Act by improperly providing gift cards to Medicare and Medicaid recipients to sway them to fill their prescriptions at Rite Aid stores. Rite Aid denied the allegation but agreed to settle to resolve the issue and avoid further litigation.
The amount paid is not particularly significant for Rite Aid's bottom line. The alleged violations happened a few years ago, ending in 2010. Ho hum, right? Actually, the better response might be, as Santa would say, "Ho ho ho." Here are three reasons investors have cause to be merry if they think about the big picture related to this settlement.
1. The case is a reminder of Rite Aid's progress in the Medicare and Medicaid markets
Which side was right in the case isn't a big concern now that it's over. However, the matter highlights a fact that is easy to forget: Rite Aid has made great strides in beefing up its Medicare Part D and Medicaid business. Look at the company's percentage of market share for the two programs since fiscal 2009, which coincided with the beginning of the period involved with the DOJ's case.
Clearly, Rite Aid's growth in Medicare and Medicaid has been significant. In fiscal 2009, the two programs accounted for just over 22% of total sales. Within only a few years, that combined amount doubled. Even with a recent decline in Medicaid as a percentage of sales, there was still solid improvement.
2. Medicaid should rebound
No gift cards should be required for Rite Aid to see considerable improvement in its Medicaid numbers this year. That's because 28 states and the District of Columbia expanded their Medicaid programs as a result of incentives provided by the Affordable Care Act.
Improvement appears to be already under way. In the second quarter, Rite Aid noted that total comparable-store sales increased by 4.1%. What drove this growth? Higher utilization in Medicaid states. And, Rite Aid CEO John Standley expects more growth over time from the Medicaid expansion.
3. The future looks bright for Rite Aid's Medicare prospects
One word sums up why Rite Aid should continue to see growth from Medicare Part D: demographics. More baby boomers become eligible for the government prescription drug program every single day.
The U.S. Department of Health and Human Services projects that over 18% of the U.S. population will be age 65 or over by 2025. In 2010, the figure was 13%. This 5% rise is a relative increase of over 38%.
Why Rite Aid can deliver
Let's play devil's advocate for a moment, though. Just because Rite Aid has grown its Medicare and Medicaid business over the past few years doesn't necessarily mean it will continue to do so. Even with Medicaid expansion in many states and an aging U.S. population, Rite Aid's competitors could outperform so overwhelmingly that the company is left in the dust.
I think that is unlikely to happen. First, the rising tide of the factors driving Medicaid and Medicare growth is big enough to lift all boats -- Rite Aid and the other major pharmacy chains. Second, Rite Aid's wellness and customer loyalty strategies should keep the company competitive.
The latter half of 2014 hasn't been great for Rite Aid's stock. However, some causes of the decline are temporary in nature. The recent settlement should remind investors of the longer-lasting factors that favor Rite Aid -- ones that could enable the pharmacy retailer to deliver gifts to patient shareholders in the years to come.
Keith Speights has no position in any stocks 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.