Medicaid expansion has added millions of new members to the rolls of managed Medicaid insurers, including WellCare Health (NYSE: WCG), and now that Democrats have won the House of Representatives in Washington, D.C., reform that eliminates Medicaid expansion seems unlikely. Yet WellCare Health's shares have tumbled over 20% recently.
In this segment from The Motley Fool's Industry Focus: Healthcare podcast, host Shannon Jones is joined by Fool.com contributor Todd Campbell to explain how WellCare Health is profiting from Medicaid expansion and why its shares could bounce back thanks to rising demand for Medicare Advantage and Medicare Part D plans.
Continue Reading Below
A full transcript follows the video.
10 stocks we like better than WellCare Health PlansWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and WellCare Health Plans 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 14, 2018
This video was recorded on Nov. 28, 2018.
Shannon Jones: Let's turn our attention to your second stock, Todd. One of the themes that I have recognized from our most recent shows, and even with this one, as we were identifying these stocks, is that the aging baby boomer population is a massive, massive opportunity for investors to get in on growth opportunities, not just on the drug side, but also on the healthcare insurance side.
Todd Campbell: Yeah! Talk about a huge market. 10,000 baby boomers per day turning 65. A longer-living population. That's significant because it means demand for healthcare services by the elderly is increasing. That should put a company like WellCare Health, ticker WCG, in a great position to profit from its Medicaid and Medicare insurance business.
Jones: It looks like WellCare plays a huge part in the marketplace for insurance, primarily Medicaid and Medicare. It's been interesting watching this particular stock, especially coming off of the midterm elections. Now that we have the Democrats in the House, things have certainly changed for this company.
Campbell: Yeah, which is interesting. The last two years after Trump was elected, and of course, the Republicans had control of both the House and the Senate, there was an attempt to eliminate Obamacare. Obamacare includes a provision that expanded Medicaid. Now, states didn't have to opt into Medicaid expansion, but many of them did. So, one of the fears over the last two years was that if Obamacare was rolled back, what would happen with Medicaid expansion?
And one of the things that investors have to recognize is that what happens with these insurers is that they go out and they bid on a per member basis. The more people who are enrolled in Medicaid programs, the more money they make in premiums. Medicaid expansion has been a huge win for companies like WellCare Health. And the threat of that getting rolled back, obviously, was something that was on the minds of investors.
Now that the Democrats took control of the House, I think the likelihood of any kind of a real repeal or replace that jeopardizes Medicaid expansion has become de-risked. It's low to non-existent in my view. I think that provides an interesting tailwind or backstop to WellCare Health's stock price, which over the last six to eight weeks has tumbled about 25%.
Jones: And it's not just Medicaid. It's also Medicare. Also, it sounds like this company is pretty aggressive when it comes to acquisitions. It has multiple areas that it's targeting and strategically focusing on.
Campbell: They get most of their sales from the Medicaid side of things. $3.2 billion in revenue from Medicaid in the third quarter. That represented about 64% of their total revenue of $5.1 billion. They're still predominantly a Medicaid insurer. They have been going out and bidding in new states. They won new bids, new contracts in Florida and Arizona. They also went out and bought a competitor called Meridian. All of those things are going to increase and drive revenue higher on the Medicaid side of things in 2019.
Then, on the Medicare side of things, they're also selling Medicare Advantage businesses. They're targeting all those people who are turning 65 and are trying to figure out, do I want to stay with regular Medicare, traditional Medicare? Or do I want to go with a Medicare Advantage plan. Because traditional Medicare doesn't have out-of-pocket limits on what the patient will have to pay, many people are choosing these Medicare Advantage plans. And as a result, its Medicare revenue is growing. They did $1.6 billion in Medicare revenue in the third quarter. That was up from $1.47 billion the year before. That's because they're getting more and more members to sign up for their Medicare Advantage plans.
Jones: It also sounds like WellCare is upping their full-year guidance for 2018. It sounds like they're growing not just on the acquisition front, but organically, as well. What can you tell us about that, Todd?
Campbell: The revenue was up year over year 15%, as I mentioned. They're a profitable company. Their medical cost ratio, MCR ratio, is somewhere in the mid-80s. They do a good job as far as managing their risk in that way.
They also have a nice little tailwind coming soon because they agreed to buy Aetna's part D business in September. As listeners may remember, Aetna has agreed to combine with CVS. But to get approval for that combination from the Department of Justice, Aetna had to get rid of its part D revenue. What ended up happening is, WellCare went out and bought it. They're going to get an additional $1.5 billion in revenue tailwinds, assuming all the members stick around once they've officially taken that over. I think we'll probably see most of that revenue show up in 2020. It may not be a 2019 thing, but 2020.
You've got the advantage of the Medicaid expansion in Florida and Arizona, organic growth, Medicare Advantage growth, and then the potential tailwind from buying the part D that could help support growth in two years rather than in the next 12 months.
Jones: Lots of opportunities for WellCare there.
Shannon Jones has no position in any of the stocks mentioned. Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool recommends CVS. The Motley Fool has a disclosure policy.