Despite Connecticut Change on Medicaid, Outlook Strong for Health Insurers

by Barry Cohen | January 19, 2012 1:08 pm

Connecticut recently became the second state to drop private insurers from serving its Medicaid members, but the big industry players who benefit from the lucrative business don’t see the move as the beginning of a trend.

Tyler Mason, a spokesman for UnitedHealth Group (NYSE:UNH[1]), which covers more than 3 million Medicaid recipients in 19 states, pointed out that many insurers recently have been awarded Medicaid contracts[2] in states such as Kentucky, Louisiana and Texas, according to an article in Kaiser Health News. He added that these deals make it clear that national managed-care organizations continue to benefit as states move away from fee-for-service.

Governments — at both the state and federal level — account for a huge part of the business of private insurers. That percentage is expected to increase with full implementation of Obamacare in 2014. In just the past three years, the share of large insurers’ revenues contributed by their Medicare and Medicaid business has jumped from 36% to 42%[3], according to a Washington Post article.

Referencing a report by Bloomberg Government, the Post said federal dollars will become even more important in two years, when Medicaid will expand to cover an eventual 16 million additional low-income Americans and Washington will begin subsidizing private-insurance policies for an estimated 19 million more.

Nearly 43 million Americans, or about 17% of the population, already get their insurance through one of the big five: UnitedHealth, Wellpoint (NYSE:WLP[4]), Aetna (NYSE:AET[5]), Humana (NYSE:HUM[6]) and Cigna (NYSE:CI[7]), according to the report. Nationally, managed-care plans are responsible for 45% of the 60 million people enrolled in Medicaid, and control $150 billion of the $400 billion in Medicaid spending, the Kaiser piece reported.

The business has made a big difference in the growing operating profits of the companies. Over the first nine months of 2011, the combined operating margin of the five industry giants averaged nearly 9% — the best three-quarter performance of the past three years, Bloomberg said.

Given these results, there’s little wonder that big insurers are among the stocks that health care fund managers are crazy about[8], reported Seeking Alpha.

To expand their Medicare business, big insurers are on an acquisition binge. As reported here in December, UnitedHealth paid a reported $2 billion to buy XLHealth Corp.[9], a provider of managed care for chronically ill Medicare members. The all-cash agreement is expected be completed in the first half of 2012.

The purchase of XLHealth, with 111,000 members, was the seventh in 2011 involving companies that manage Medicare coverage. Industry acquisitions are likely to increase as more of the baby boomers — people born from 1946 to 1964 — turn 65. Targets that have been mentioned include Coventry Health Care (NYSE:CVH[10]), WellCare Health Plans (NYSE:WCG[11]) and Health Net (NYSE:HNT[12]).

Despite the Connecticut move away from the private insurers, the outlook still looks bright for the industry. Investors who want in on the projected growth of the companies but don’t want to pick a single stock should consider the iShares Dow Jones US Healthcare Provider Index (NYSE:IHF[13]).

As of this writing, Barry Cohen did not hold a position in any of the aforementioned stocks.

  1. UNH:
  2. recently have been awarded Medicaid contracts:
  3. has jumped from 36% to 42%:
  4. WLP:
  5. AET:
  6. HUM:
  7. CI:
  8. are crazy about:
  9. to buy XLHealth Corp.:
  10. CVH:
  11. WCG:
  12. HNT:
  13. IHF:

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