Obamacare's Repeal? It's Not All Good News for Insurers

By Markets Fool.com

Donald Trump won the White House on a platform that includes repealing the Affordable Care Act, aka Obamacare. That's mostly good news for big insurers that have lost hundreds of millions of dollars selling plansthrough Obamacare's exchanges, paying its fees, and adhering to its consumer-centric regulations.

Continue Reading Below

However, a repeal isn't all good news for the industry. Acomplete repeal of Obamacare could result in a steep drop in the number of people enrolled in Medicaid, and if that happens, it could significantly reduce revenue at private insurers that manage state Medicaid programs.

Image source: DonaldJTrump.com.

The goods news

Before explaining the how a rollback in Medicaid could hurt insurers, let's spend a moment considering the potential benefits to insurers that could stem fromObamacare's repeal.

If Obamacare disappears, large insurers such asUnitedHealth Group (NYSE: UNH) will no longer have to figure out how to price and manage marketplace plans that have been losing them money.

Continue Reading Below

UnitedHealth Group's losses on Obamacare plans could reach $650 million this year, and those losses have both weighed down earnings and forced management to reduce its exposure to the exchanges. In 2016, UnitedHealth Group sold Obamacare plans in more than 30 states, but next year, it's offering plans in only a handful of states.

Dismantling Obamacare could also eliminate the health insurance industry tax. Last year, that tax cost insurers a combined $11.3 billion, and the industry is expected to pay the IRS a similar amount this year. UnitedHealth Group's share of that tax bill was $1.8 billion last year, and the company expects its share to be $1.9 billion this year.

Removing restrictions that limit the ratio of premiums charged to insure older Americans to younger Americans could also support earnings.Obamacare limits that ratio to 3:1, but historically, the ratio of healthcare costs for these two patient populations has been closer to 6:1. Removing this restriction would give insurers more flexibility to bring patient premiums more in line with their costs of care.

Further, insurers'profitability would benefit from the removal of Obamacare's requirement that insurers spend at least 80% of their premiums on member healthcare. Today, insurers that spend less than 80% on healthcare have to send members rebate checks. If this rule disappears, insurers could deliver more money to their bottom lines by reducing what they spend on medical costs.

The bad news

Deregulation would give insurers profit-friendly tailwinds, but it could negatively impact their revenue from state Medicaid programs.

Obamacare includes provisions allowing states to opt into Medicaid expansion, and more than 30 states have chosen to do so. According tothe Centers for Medicare and Medicaid Services, Medicaid enrollment has grown by 15.4 million people to 72.8 million people since Obamacare's launch, and most of that membership growth took place in the expansion states.

Surging membership has been a boon to Medicaid insurers, both big and small. UnitedHealth Group makes most of its money selling employer-sponsored plans, but itsMedicaid enrollment has grown significantly over the past three years. In the past 12 months alone, its Medicaid enrollment grew by 485,000 to 5.8 million people, and as a result, revenue at the company's community and state insurance segment jumped 12% year over year to $8.3 billion in the third quarter. For perspective, consider that UnitedHealth Group's Medicaid membership in the third quarter of 2013 -- the last full quarter before Obamacare's launch -- totaled 3.95 million people, and its community and state segment revenue was $4.6 billion.

Smaller insurers that get most of their revenue from running state Medicaid programs could be hit hardest. For example,Molina Healthserved 1.9 million people through its various products prior to Obamacare's enactment. Today, it serves 4.2 million members. In Q3 2013, Molina's earnings per share were $0.17. Last quarter, they were $0.85. While Medicaid expansion isn't the only reason for Molina's success, it has been a big contributor to it.

Looking ahead

President-Elect Trump has said that he might be willing to keep some aspects of Obamacare in place, such as allowing children to stay on their parents' health insurance plans until age 26. He's also indicated that he prefers free-market solutions, such as competing across state lines, to curb premiums in the future. However, Trump hasn't offered up a comprehensive blueprint for replacing Obamacare, and until he does, investors are left guessing at how his repeal and replace plans will shake out for insurers. For now, repealing Obamacare should be a net win for big insurers like UnitedHealth Group, but it could be a net loss for smaller, niche players that have a lot of exposure to Medicaid.

Forget the 2016 Election: 10 stocks we like better than UnitedHealth Group
Donald Trump was just elected president, and volatility is up. But here's why you should ignore the election:

Investing geniuses Tom and David Gardner have spent a long time beating the market no matter who's in the White House. In fact, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and UnitedHealth Group wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 7, 2016

Todd Campbell has no position in any stocks mentioned.Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned.Like this article? Follow him onTwitter where he goes by the handle@ebcapitalto see more articles like this.

The Motley Fool recommends 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.