Medicaid Managed-Care Companies Could Benefit From Reform

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; [e-mail]