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The 1 Part of Obamacare Insurers Don't Want to Change

By Todd Campbell - Jan 31, 2016 at 7:20AM

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Medicaid expansion is boosting financial results at the nation's biggest health insurance companies.

Insurers are reporting their full-year results for 2015, and digging into the data suggests that while insurers are struggling to profit from selling health insurance on Obamacare exchanges, they're profiting handsomely from Obamacare's expansion of Medicaid.

A bit of background
Medicaid expansion is a key provision in Obamacare, and although a Supreme Court ruling in 2012 made Medicaid expansion optional for states, 32 states, including D.C., still chose to embrace it.

In those states, Medicaid is available to Americans earning up to 138% of the federal poverty level, which was $27,724 for a family of three in 2015.

In exchange for participating in Medicaid expansion, the federal government agreed to cover 100% of the state's cost associated with new members who qualify for coverage under the provision until 2016. Between 2016 and 2020, the federal government's reimbursement rate steadily falls until it reaches 90%, where it remains thereafter.

As of October, 13.5 million Americans have been newly enrolled in Medicaid since the marketplaces opened in the fall of 2013.

Money to be had
In 2015, the nation's largest insurers made a lot of money running state Medicaid programs; especially in states that agreed to Medicaid expansion.

For example, UnitedHealth Group (UNH 0.43%), the country's biggest health insurer, reports that its Medicaid membership increased by 250,000 people last year and, as a result, sales in its community and state segment surged 22.4% higher to $28.9 billion.

UnitedHealth Group didn't break out how profitable Medicaid is in its fourth-quarter report, but the business appears attractive, given that CEO Stephen Helmsley said on the company's fourth-quarter conference call that UnitedHealth Group will make up to 20 bids this year to manage various state programs. He also referred to the company's pipeline of state business as "very strong." In my opinion, it's unlikely that Helmsley would be eagerly hunting for new state contracts if managed programs such as Medicaid weren't money-makers.

That view is backed up by results reported by Anthem (ANTM 0.65%), the second largest health insurer in America. Anthem saw its Medicaid membership rolls expand by 721,000 people, and that helped its government business revenue and profit to climb 20.8% to $40.8 billion and 66% to $1.98 billion last year, respectively. 

Contrasting programs
Medicaid's success stands in stark contrast to the troubles that are facing insurers participating in the Obamacare exchanges.

Because health insurance premiums are high, many healthy Americans on a tight budget are opting against getting insured through the exchanges, and that means that a larger-than-expected proportion of marketplace enrollees are sicklier and more costly to insure.

As a result of the adverse nature of the current patient pool, UnitedHealth Group reported $720 million in losses from plans sold on the exchanges in 2015, including $245 million in losses taken in advance of losses that the company expects to incur this year. With losses totaling in the hundreds of millions of dollars per year, it's not surprising that UnitedHealth Group's management isn't sure it wants to keep offering plans on the exchanges in the future. 

Fool-worthy bottom line
Medicaid expansion has been a runaway success for the insurance industry, and if more states embrace it, then the program should provide above-industry growth for a while longer. According to the Kaiser Family Foundation, three states are still actively discussing signing on to expand their Medicaid program, and if all 19 states that didn't expand their program eventually did, then up to 3 million people would become newly enrolled in Medicaid.

Because Medicaid programs are a profit center for insurers and Medicaid membership could still head higher in the coming years if expansion is adopted, it would seem that Medicaid expansion is one area of Obamacare that the insurance industry would be reluctant to see go away. 

Todd Campbell has no position in any stocks mentioned. The Motley Fool recommends Anthem and UnitedHealth Group. 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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Stocks Mentioned

UnitedHealth Group Incorporated Stock Quote
UnitedHealth Group Incorporated
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Anthem, Inc. Stock Quote
Anthem, Inc.
ANTM
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