Will Medicaid Make Insurers The Best Investment of 2015?

By Markets Fool.com

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Source: Anthem

It wasn't long ago that nervous investors sold off shares of health insurers over fear that health care insurance reform would derail industry profitability. However, results this past year suggest that health insurers are in better shape than they've been in years, and that's particularly true of insurers that run state Medicaid insurance programs. Those insurers include big diversified national companies like Anthem, but they also include smaller niche private Medicaid insurers Centene Corp, Molina Healthcare, and Health Net-- all of which are expected to deliver earnings growth in 2015.

First, a bit of background
According to the Department of Health and Human Services, the number of people that are enrolled in state Medicaid programs tops 68 million, or roughly 9.7 million more people than were enrolled in the program prior to the launch of Medicaid expansion in the fall of 2013.

That enrollment may be surprising to investors given that the Supreme Court's ruling in 2012 that states did not have to participate in Medicaid expansion had many thinking that enrollment would be more of a trickle than a flood.

Heading into 2014, just 25 states had signed up to expand Medicaid access to residents earning up to 138% of the federal poverty level, yet increasing awareness tied to the launch of the Affordable Care Act appears to have created a woodwork affect that is increasing enrollment in both expansion and non-expansion states. According to the Kaiser Family Foundation, national Medicaid enrollment increased by 8.3% in fiscal year 2014 (which in most states ended last June) with expansion states growing by 12.2% and non-expansion states growing by 2.8%.

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Translating into growth
The robust growth in Medicaid enrollment has translated into significant revenue and profit tailwinds across the industry.

For example, Anthem, the second largest health insurer in terms of people served, helps run private Medicaid programs for several states, and the positive impact from rising membership has been a key reason behind the company bumping up its full year EPS guidance from at least $8 per share entering 2014 to estimates of at least $8.83 for the year exiting the third quarter.

In the third quarter, Anthem reported that enrollment in its Medcaid programs increased by 754,000 people year over year. Those additional members were a major reason that Anthem's sales in its government business segment climbed 10.1% to $8.55 billion from a year ago during the quarter and why Anthem's operating profit for that segment improved from $678.5 million in the nine months ending September 2013 to $837 million in the nine months ending September 2014.

The positive impact of Medicaid enrollment on the smaller private Medicaid insurers has been even more pronounced.

Centene's Medicaid enrollment jumped from 1.95 million last year to 2.57 million in the third quarter.That growth came in part from serving 193,100 members through expansion programs in California, Illinois, Massachusetts, New Hampshire, Ohio, and Washington. As a result, Centene reported that its third quarter sales and earnings per share totaled $4.2 billion, up 53% year over year, and $1.34, up 52% year over year, respectively.

Similar growth was recorded by Molina Healthcare and Health Net. At Molina Health, membership jumped from 1.94 million to 2.40 million people, leading to premium revenue of $2.32 billion in the third quarter, up from $1.58 billion last year. Health Net's membership climbed by 24.7% year over year during the quarter, including an 11.5% increase in Medicaid membership between the second and third quarter alone. That led to third quarter sales jumping 36.6% from a year ago to $3.8 billion.

Continuing to continue
According to Kaiser Family Foundation enrollment estimates, results could head even higher over the next couple of quarters. That's because more states have adopted Medicaid expansion.

Kaiser expects that national Medicaid enrollment for the fiscal year ending June 2015 will have grown by 13.2% from fiscal year 2014, with enrollment in expansion states increasing 18% and growth in non-expansion states climbing by 5.2%.

That growth should translate into significant earnings opportunity for Medicaid insurers in 2015. Analysts estimate that earnings per share at Anthem will climb 6.3% in 2015 from 2014, in part because of Medicaid, but analysts expect even greater bottom-line upside for the private Medicaid insurers. They're looking for 19.6% EPS growth for Centene, 106% EPS growth for Molina Healthcare, and 38.7% EPS upside at Health Net. If enrollment comes in as expected and these companies deliver on those lofty targets, then Medicaid may make health insurers top stocks in 2015.

The article Will Medicaid Make Insurers The Best Investment of 2015? originally appeared on Fool.com.

Todd Campbell owns shares of Molina Healthcare, and Health Net. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool recommends Anthem. 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.