Medicaid Growth Lies Ahead for HMOs But With Risks

As U.S. health insurers begin adapting to the newly passed health reform overhaul, the 2014 expansion of the Medicaid program for the poor presents one clear growth area for the industry.

But that growth comes with some risks and remains several years away. Before the Medicaid expansion takes hold, even greater challenges may lie ahead for the state-administered program.

Mounting fiscal pressures, some stemming from the new reform law, could lead recession-hit states to cut payments to the health insurers that operate Medicaid plans, as happened in 2009.

"The opportunity is greater than the risk, but it's not all roses," said Eileen Ellis, a consultant and former director of Michigan's Medicaid program. "There are going to be some bumpy times, especially between now and January 2014."

The new law raises the federal income limit for eligibility to 133 percent of the poverty level and broadens the type of enrollees to include adults who have no children. The changes will add 15 million Americans to Medicaid, according to estimates by the Congressional Budget Office, boosting enrollment about 30 percent.

The expansion also brings uncertainty: It largely involves insuring a new type of population, while the huge influx of enrollees could create complications.

Although the opportunity is several years away, investors appear to be seizing on it, as shares of insurers that specialize in Medicaid sharply outpaced the rest of the industry in March, when prospects for reform's passage brightened.

Centene Corp rose more than 30 percent, and Amerigroup Corp gained more than 20 percent. Fellow Medicaid specialists Molina Healthcare and WellCare Health Plans Inc also outperformed.

"What we've been telling investors is you need to start looking at these stocks in about 2012," BMO Capital Markets analyst Dave Shove said. "I would love to get excited about those names, but there's a possibility they all face rate cuts over the next 12 months."

Medicaid could be a growth opportunity for larger insurers as new regulations and cuts under reform affect their plans serving individuals and those involving the Medicare program for the elderly.

UnitedHealth Group Inc and WellPoint Inc already rank among the largest Medicaid providers. Companies traditionally focused almost solely on employer-based coverage such as Aetna Inc also may seek to enlarge their Medicaid plans, perhaps by buying one of the specialists.

Medicaid's enrollment totals nearly 47 million, according to the Kaiser Family Foundation, although roughly 60 million, or one in five Americans, receive coverage at some point during the year.

The share of Medicaid enrollees in managed care plans rose from 56 percent to 71 percent in the past 10 years, according to Kaiser, a healthcare think tank. The companies bid for contracts awarded by states.

Collins Stewart analyst Brian Wright estimates the enrollment gains will have a corresponding 30 percent boost to earnings of the Medicaid companies.

Wright upgraded Amerigroup shares to "buy" from "hold" after the U.S. House of Representatives passed the reform bill earlier this month, saying the company will be a prime beneficiary of the expansion.

To help the states, the federal government is funding the newly eligible members, by 100 percent in the first few years and stepping down to 90 percent support by the end of the decade.

But the new law requires that states retain their current eligible Medicaid members, leaving them unable to pare back should the economy worsen and threaten revenues, said Ellis, who is now with consulting firm Health Management Associates.

Instead, the states could choose to cut payment rates to the health insurers.

"The bill exacerbates potentially what might happen to their capitation rates because it doesn't allow states to cut enrollment," Ellis said.

Current Medicaid enrollees -- which unlike those covered by the expansion do not have the federal backing -- also could continue to burden states, leading to rate cuts.

"In between now and then, we don't see any reason that it's any different than it has been for the last few years," Shove said. "The states are under tremendous budget pressure, and some of these states are places where there's lots of Medicaid."

The Medicaid additions under reform stand to be mainly adults with no children, a generally new demographic for the program.

"There will be some trial and error as states look to set reimbursement rates for the managed care companies for the new population," Stifel Nicolaus analyst Tom Carroll said.

While the membership gains could give the companies leverage to get better rates from providers, power could shift to primary-care doctors, who will be in even greater demand, said Joel Michaels, a Washington-based lawyer who represents health insurers.

"A big risk going forward will be the ability of the plans to control the payments and costs at the provider level," said Michaels of the firm McDermott, Will & Emery. "The provider dynamic issue is the most uncertain piece."