News that Louisiana will become the latest state to expand Medicaid benefits to more low-income Americans under the Affordable Care Act means a $1 billion market will soon be born for the health insurance industry.
And that's just one state.
The expansion of Medicaid benefits under the health law has come a long way since the Supreme Court four years ago allowed states to opt out of accepting federal dollars to provide more coverage for poor Americans. Initially, only about 20 states sided with President Obama's effort to expand the health insurance program for poor Americans.
But Louisiana's new Democratic governor signed an executive order in January that makes the state the 31st (plus the District of Columbia) to take advantage of a generous federal funding stream to expand Medicaid benefits. And that's good for investors in health insurance stocks at a time when insurers are struggling in the individual commercial public-exchange business and threatening to withdraw from providing those subsidized benefits.
Medicaid expansion helped Anthem (NYSE:ANTM), Aetna (NYSE:AET), and UnitedHealth Group (NYSE:UNH) blunt the impact of public-exchange losses on their fourth-quarter profits. Meanwhile, it helped Centene (NYSE:CNC) and Wellcare Health Plans, which are more pure-play private insurers in the Medicaid business, beat Wall Street earnings expectation in the fourth quarter.
"2015 was a banner year for Centene," CEO Michael Neidorff said earlier this month on the company's fourth-quarter and full-year 2015 earnings call.
Louisiana's billion-dollar Medicaid market
About 3.5 million of Centene's 5 million members are in Medicaid plans.
"We added over 1 million members, representing growth of 26%, with 5.1 million beneficiaries," Neidorff said. "In January, the governor of Louisiana signed an executive order to expand Medicaid coverage under ACA by July 1. This represents a future growth opportunity for Centene, given our status as the largest Medicaid health brand in the state."
Neidorff said the governor's move, which will increase that state's enrollment in all Medicaid plans by 150,000 to 400,000, creates a "$1 billion market" for health insurers. He didn't specify what Centene's share might be.
Across the country, enrollment in private Medicaid health plans grew by almost 8 million in 2015, according to a report PricewaterhouseCoopers conducted for Medicaid Health Plans of America, which represents the health insurance industry. Medicaid plans are also gaining more members even in states that didn't go along with the Medicaid expansion, because private health plans already have a large role in administering benefits for low-income Americans in the states. Increasingly, states are handing off more of the administration of Medicaid benefits to private insurers, the PricewaterhouseCoopers report said.
More states turn to private insurers to manage Medicaid
Medicaid Health Plans of America said the number of Medicaid beneficiaries in a private managed-care plan is now "over 70%," compared with 65% in 2014.
The latest update from the Kaiser Family Foundation indicates that three more states -- Virginia, South Dakota, and Wyoming -- are considering adoption of the Medicaid expansion under the health law.
This is the last year states can expand their Medicaid programs entirely with federal dollars, though President Obama's new budget proposes additional time for states to take advantage of full funding from the federal government. Before the Affordable Care Act, state Medicaid programs were generally paid by a 50-50 split between state and federal tax dollars used to fund health benefits for the poor.
But the expansion is funded 100% with federal dollars through the end of this year. The state gradually has to pick up some costs beginning in 2017, but the federal government still picks up 90% or more of Medicaid costs through 2020. This prompted more states -- Louisiana this year and others last year, including Montana, Iowa, Indiana, and Pennsylvania -- to expand Medicaid under the health law, according to Kaiser. Those additions have been a boon to the healthcare industry.
"We expect Medicaid to add more than 350,000 lives reflecting the addition of new business in the state of Iowa as well as continued organic growth in core and expansion products," Anthem CEO Joe Swedish told analysts on the company's fourth-quarter earnings call. "We continue to see states gravitate toward managed care to be the solution for more complex populations and services, and we expect to be front and center supporting these states' initiatives."
If health insurance CEOs like Swedish are correct, that will be great news for health insurance companies and investors who own their stocks.
Bruce Japsen 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.