Medicaid is a joint federal-state health care program for the poor, but in most states it is managed by private insurance companies under contract.
These companies offer federally funded insurance, Medicaid, to low wage earners. About 16 million additional Americans may qualify for Medicaid in 2013 alone. This will translate into a major business expansion for insurance companies that serve them.
From 2005 to 2011, total enrollees in the Medicaid program grew by more than 10 million people, going from 60.1 million in 2005 to 70.4 million in 2011. That figure equals about 22 percent of the U.S. population, which means there was one person on Medicaid for every 5 Americans in 2011.
The Affordable Care Act of 2010, signed by President Obama in 2010, creates a national Medicaid minimum eligibility level of 133% of the federal poverty level ($29,700 for a family of four in 2011) for nearly all Americans under age 65. This Medicaid eligibility expansion goes into effect on January 1, 2014.
The law creates a new class of people eligible for Medicaid.
According to the Urban Institute's calculation a total of 22.3 million uninsured with income below 133 percent of federal poverty level would be potentially eligible for Medicaid if all states fully implemented the new law. Of these, 67 percent (15.1 million) are adults who are not currently eligible for Medicaid but would be made eligible under the new law's Medicaid expansion; 13 percent (2.9 million) are children who are currently eligible for Medicaid or the Children's Health Insurance Program but not enrolled, 20 percent (4.3 million) are adults who are currently eligible for Medicaid but not enrolled.
Before the new law, most non-disabled adults with incomes below this level were not eligible for Medicaid. Few states covered non-disabled parents up to this income level, and even fewer states covered non-disabled adults without dependent children in Medicaid. In contrast, children in this income range are already covered under Medicaid or the Children's Health Insurance Program.
Amerigroup, a Virginia based Fortune 500 company, serving more than 2.7 million members in 13 states.
Nationwide, the company serves one out of every 23 Medicaid recipients and one out of every 24 children covered by CHIP (a government program for children).
Amerigroup's share of the 16 million new Medicaid recipients could generate substantial new revenue. AGP will further benefit from having to pay lower rates of reimbursements.
AGP's share price increased 50 percent after the Supreme Court ruling last June. The company's 52-week range was $51.98 - 91.75.
WellPoint, the second-biggest U.S. health insurer is buying Amerigroup for $4.9 billion at a 43% premium, with the deal closing in December 2012.
The premium is worth it, according to the company, considering that Amerigroup brings a mass of new state-sponsored healthcare accounts to WellPoint, along with some dual eligible managed care customers.
Dual-eligible patients are people who qualify for both Medicare and Medicaid. About two dozen states are seeking federal approval for projects that will coordinate care for these patients, who often have complex and costly medical problems.
It is also a strategic move to compensate for WellPoint's weakness under the new law. At present, Wellpoint relies heavily on small group and individual insurance, which means that in the future the company would have to accept all patients and spend 80 percent of its collected premiums on patient care.
Currently WellPoint often rejects people who have pre-existing conditions and can raise premiums as it sees fit. The new law will restrict WellPoint's business and earnings potential.
Wellpoint's third-quarter EPS was $2.15, an increase of 18% from $1.77 in the prior year quarter. The full-year EPS outlook is $7.30 to $7.40.
The company repurchased 11.3 million shares for $655 million in the third quarter, and year-to-date total of repurchased shares was over 39 million shares or 11.5% of all shares outstanding at the end of 2011 for nearly $2.5 billion.
Wellpoint's 52-week range was $52.52 - 74.73.
Interim CEO John Cannon announced a major reorganization of the company.
The move follows former CEO Angela Braly's resignation in August, after five years in which the insurer struggled at times to predict medical costs and keep enrollments up.
Separate Medicare and Medicaid divisions will be set up to sell plans for those government-backed insurance programs.
As a percentage of the overall enrollment, Medicaid will increase from about 6% today to 12% when the transaction closes.
The combined company would be providing healthcare benefits to approximately 36.4 million members or more than one in nine Americans and one out of every 12 Medicaid recipients. The combined enterprise-wide revenue may exceed $70 billion in 2012.
To fund the acquisition, Wellpoint will use approximately $700 million of available cash on hand, and raise approximately $4.2 billion through commercial paper and new debt issuance.
WellPoint pays a dividend, the amount of which for the third quarter of 2012 was $0.2875 per share. The share price's 52-week range was $46.48 to 74.41.
Missouri based Centene at the end of the third quarter served 2.5 million members, an increase of 887,300 members, or 55% year over year.
At the end of 2011 Medicaid accounted for 74% of its at-risk membership, while CHIP and ABD (also including Medicare) accounted for 12% and 12%, respectively.
Premium and service revenue was $2.2 billion, compared with $1.3 billion in 2011, an increase of 75% year over year. The $950 million increase reflects the addition of four new states.
Health Benefits Ratio (a ratio, used in the insurance industry: the company's costs incurred in providing health services divided by the revenue from member premiums) of 93.3%, compared with 85.0% in 2011.
Operating cash flow was $317.2 million for the third quarter.
Guidance for the full year: premium and service revenue $8.1 billion to $8.3 billion, earnings per share $0.56 to $0.66, consolidated health benefits ratio 90% to 91%.
The stock's 52-week range: $24.26 - 50.98.
This company is located in Long Beach, California, and it operates Medicaid managed care plans in the states of California, Florida, Michigan, Missouri, New Mexico, Ohio, Texas, Utah, Washington, and Wisconsin, that serve a total of approximately 1.7 million members.
Premium revenue for the third quarter grew to $1.5 billion, a 31% increase over the third quarter of 2011.
Revenue grew due to membership increases, and the addition of more benefits to managed care.
The ABD (Medicaid for the Aged, Blind or Disabled ) enrollment has grown to 15% of the total membership, representing about 1/3 of the company's revenue. These chronically-ill and complex members are very important to the company because they represent a significant area of future growth.
The consolidated medical care ratio decreased from 92% in the second quarter to 88% in the third quarter.
The company has cash and investments in excess of $1 billion. The stock's 52-week range: $17.63 - 36.83
Wellcare Health Plans
This Florida-based company at the end of 2011 served approximately 2.6 million members in eight states, which are Florida, Georgia, Hawaii, Illinois, Kentucky, Missouri, New York, and Ohio.
Premium revenue for the third quarter increased 18% year-over-year to $1.8 billion.
Net income for the third quarter was $46 million, compared with $93 million for the same period in 2011, or $1.05 per share.
Benefit ratio was 86.3%, an increase of 6.5 % year-over-year.
At quarter end cash and investment held was $350 million.
2012 guidance for earnings per share: $4.90 to $5.05. The stock's 52-week range was $46.00 - 74.41.
Coventry Health Care
The Bethesda, MD based company's Medicaid program in nine states covered 692,000 members.
Aetna, the third-largest managed-care firm by membership, announced plans in August to buy Coventry in a cash-and-stock deal that is valued at $5.7 billion. The companies expect the deal to close in mid-2013, pending antitrust approval.
Aetna secured long-term financing necessary for the deal, with a public offering of about $2 billion.
The net proceeds from the offer, along with cash and $500 million of commercial paper to be issued before closing, is expected to finance the cash part of the Coventry purchase price.
The deal will add more than 5 million customers to Aetna's 36.7 million members including 250,000 people on Medicare health plans and 930,000 on Medicaid.
Coventry's share price moved between $27.72 and 44.26 in the past 52 weeks.
Demise of the private health insurance
In the private sector under the new law, an insurer will no longer be able to deny coverage to citizens because they have pre-existing conditions.
Insurers will be required to spend at least 80% of patients' premiums on medical care. Currently most insurers spend a lot more than 20% on administrative expenses, therefore some serious belt-tightening is coming to the companies.
Also, the law will make it very difficult for insurers to raise prices as they see fit.
The reality is that Obamacare brings an earnings cap to the sector.
But there is a prospect for growth on the public side.
On recent earnings reports of such majors as UnitedHealth (UNH), WellPoint, Aetna, Cigna (CI) or Humana (HUM), one can see that most of the growth is coming from public programs like Medicare and Medicaid, not from the private sector.
For example, last year UnitedHealth's public sector membership (Medicare Advantage and Medicaid) went up nearly 7% in contrast to its private sector membership, which increased a little over 4%.
WellPoint's growth in the public sector was even faster. Even before the purchase of Amerigroup, their Medicare enrollment was up 17% and Medicaid enrollment grew 6.3%.
Consolidation in the industry is well under way: WellPoint bought Amerigroup and Aetna is buying Coventry Health Care.
There is intense speculation about the takeover chances of the remaining companies like Molina Healthcare, Centene or WellCare. The big insurance companies see which way the trend is going and finding a way to buy into it.
What to do?
As of this writing, new spending on Obamacare-related programs, primarily the expansion of Medicaid and the new subsidized insurance exchanges, is negligible. But by 2017, the federal government will be spending an additional $206 billion a year on Obamacare programs, on top of the $1.1 trillion spent elsewhere. And these figures don't count the hundreds of billions of dollars that state and local governments spend on healthcare, Medicaid in particular.
A flood of government money is on the way into this segment of the economy and healthcare investors are well advised to take notice and possibly take advantage of the trend.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.