Medicaid Managed-Care Companies Could Benefit From Reform
May 29 2009 - 1:58PM
Dow Jones News
Health reform could prove a boon to managed-care companies
serving Medicaid beneficiaries if U.S. policy makers expand the
government insurance program to include many more low-income
Americans.
Companies like Amerigroup Corp. (AGP), Centene Corp. (CNC) and
Molina Healthcare Inc. (MOH), each of which get 85% or more of
their pretax income from their Medicaid operations, could see the
revenue available in the Medicaid market expand by more than a
third in a government-led health-care reform, according one
estimate.
The larger market could lead to increased attention from bigger
managed-care companies, already facing unfavorable pricing in the
commercial and Medicare Advantage marketplaces. Those companies
could try to tap further into Medicaid with either their own
operations or by buying one of the more Medicaid-focused
companies.
Medicaid "will become an increasingly attractive growth
platform," Credit Suisse analyst Gregory Nersessian said, noting
that Medicaid - which is the largest payer for long-term care
services for the elderly and disabled and which covers more than
40% of all U.S. births - is "a relatively efficient source of
coverage," delivering services at the lowest per member cost of any
funding source.
It's unclear, though, if Wall Street has factored in the
potential growth.
"I don't think it's been priced in yet. The whole industry is
down because people are worried about what health reform will
bring," Molina Chief Executive Mario Molina said.
Since the presidential election, Amerigroup, Centene and Molina
have each outperformed the 9.8% decline in the S&P 500 but
underperformed the 7.6% gain in the Dow Jones Wilshire index that
tracks health insurers.
However, Deutsche Bank analyst Scott Fidel noted that the
Medicaid managed-care stocks have traded at a relative premium to
the commercial and Medicare health insurers for the past several
months.
The three - along with WellCare Health Plans Inc. (WCG), which
gets 37% of its pretax income from Medicaid, according to Credit
Suisse - have stocks priced around 10 times projected earnings,
higher than their commercial peers, whose multiples hover in the
mid-to-high single digits. However, the Medicaid stocks are trading
well below their average multiples from the past few years of
around 15.
Medicaid now delivers health benefits to 60 million Americans.
How much it expands under any government reform depends on numerous
variables yet to be determined, including its exact structure and
the income limits.
According to the nonprofit Kaiser Family Foundation, opening
eligibility to all low-income adults - and not just those with
children or a disability - could provide coverage to an estimated
21 million Americans, or more than 40% of the uninsured.
Nersessian, the Credit Suisse analyst, said such a plan could
increase the revenue potential for Medicaid managed-care
organizations by 37% to 48%. As a result, Nersessian said, he
"would not be surprised to see one or more of the Medicaid pure
plays targeted for consolidation."
The road to expansion is marked with numerous uncertainties,
however, including questions of funding, particularly for
cash-strapped states that bear a significant portion of Medicaid
costs. Another variable is provider rates and whether doctors, who
generally receive lower reimbursement for Medicaid patients, will
be willing to absorb what Nersessian called an "enormous explosion"
in new enrollees.
The Senate Finance Committee is contemplating proposals to
standardize Medicaid eligibility, and leaders on the committee have
said they hope to introduce comprehensive, bipartisan health reform
legislation in June. Options include a direct Medicaid expansion,
or combinations of an expansion and use of a Web-based health
insurance exchange or a subsidy.
Either way, "it's a significant increase for Medicaid in this
new system" being considered by senators, said Barbara Coulter
Edwards of health-care research and consulting firm Health
Management Associates.
Health insurers favor the idea of a straightforward expansion of
the existing program over establishment of an insurance exchange,
saying it would be simpler, faster and more cost-effective and
allow managed-care companies to provide the social services that
the Medicaid population needs.
"We have long believed that everybody needs some form of
insurance," and are encouraged that it appears this year "something
meaningful will happen," Amerigroup Chief Executive James Carlson
said. Medicaid includes several features reformers are seeking:
portability, no exclusions for pre-existing conditions and no
underwriting, he said.
-By Dinah Wisenberg Brin, Dow Jones Newswires; 215-656-8285;
dinah.brin@dowjones.com