Medicaid Expansion a Huge Boon for Insurers

News that Montana will become the latest state to expand Medicaid benefits to more low income Americans under the Affordable Care Act means another 70,000 potential customers for the health insurance industry.

Three years ago, U.S. Supreme Court Chief Justice John Roberts saved the Affordable Care Act, better known as Obama, by becoming the fifth and deciding vote on the nine-member court to uphold the law. His ruling also allowed states to opt out of expanding Medicaid benefits to poor Americans.

At the time, 2012 election year politics meant many states led by Republican governors and GOP legislatures balked at going along with expanding Medicaid benefits -- in part to avoid siding with Democratic President Obama and a key part of a health law they disliked. Less than half of U.S. states agreed to expand Medicaid when first given the opportunity three years ago.

But times are changing. And that's good for insurance companies and their stocks, as health plans take advantage of steady growth stemming from millions of Americans accessing Medicaid benefits for the first time.

This year, for example, Indiana's Medicaid expansion began Feb. 1 and Pennsylvania's began Jan. 1, so there are now a total of 28 states plus the District of Columbia that have expanded the health insurance program for poor Americans under Obamacare. Montana, which still has to work through a waiver with the Obama administration, would become the 29th state to expand, following a bipartisan agreement between Republican lawmakers and the state's Democratic governor.

Indiana was one of the Republican-leaning states that found a way to expand Medicaid under the law. Pennsylvania agreed to expand when the state last year was led by a Republican governor (a Democrat is in office now). And Iowa and Michigan, both states with Republican governors, expanded Medicaid under Obamacare last year.

Medicaid expansion figured in decisions by insurers Anthem , Aetna and UnitedHealth Group to raise 2015 earnings guidance in the last two weeks. And Centene , which is among the more pure-play private insurers in the Medicaid business, raised its revenue forecast for 2015.

"The pipeline of opportunity for our government business remains substantial," Anthem CEO Joe Swedish told analysts on the company's first quarter earnings call. "We currently estimate $65 billion of new business could be awarded by the end of 2018, split about evenly between traditional Medicaid and new populations and specialized services. We believe our experience and footprint positions us very well to continue our growth as we help states address the challenges of lowering healthcare costs and improving quality for their residents."

Medicaid plans are gaining more members even in states that didn't go along with the Medicaid expansion because private health plans already have a large and growing role in administering benefits for low income Americans in the states, according to Medicaid Health Plans of America. Medicaid enrollment jumped by more than 9 million in 2014, according to a December report by PricewaterhouseCoopers.

Aetna is projecting revenues from its Medicaid business to grow by "over $1 billion" in 2015, "representing over 15 percent annual growth while exceeding our target pre-tax operating margin," Aetna chief executive Mark Bertolini told analysts in the insurer's first quarter earnings call.

"This quarter we began serving new members as part of our recent launches in Louisiana and New Jersey and we added over 30,000 members across multiple state programs related to ACA expansion," Bertolini said.

In the past, the Medicaid business has been less than stable because it was generally funded via a 50-50 split between state and federal funds. But the expansion population is funded 100 percent with federal dollars through 2016. States gradually have to pick up some costs beginning in 2017, but the federal government still picks up 90 percent or more of Medicaid costs through 2020.

While states can still cut funding to Medicaid that can trigger spending issues, the health law makes it less likely there will be as many payment disruptions or funding battles than existed in the past, due to the steady flow of federal dollars for low income Americans who sign up for privately administered coverage.

These are bullish scenarios for insurers administering Medicaid for states.

Anthem chief financial officer Wayne DeVeydt summed up the opportunity this week on his company's earnings call: "Let me first talk about Medicaid and where we're seeing the positive trends. To be candid, I would say that we're generally seeing it across the board."

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Bruce Japsen has no position in any stocks mentioned. The Motley Fool recommends Anthem and 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.

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