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Insurers that run Medicaid programs remain confident they are entering an unprecedented phase of expansion, despite concerns that recent budget issues at many states--which are responsible for the government program--may hamper some of that near-term growth.
The chief executive of Centene Corp. (CNC) this week dismissed such worries, prompted by recent proposals in several state capitals to cut Medicaid spending because of budget shortfalls. Meanwhile, WellPoint Inc.'s (WLP) financial chief this week pointed to Medicaid as an important growth area for the largest U.S. health insurer by members.
Industry executives argue the benefits of outsourcing the costly government program. Medicaid, on average, accounts for some 20% of state budgets, and health insurers say they can help governments lower costs through their managed-care plans.
"Difficult economic times make for sound public policy. States are now more willing to move from fee-for-service to managed care," said Michael Neidorff, Centene's chairman and chief executive.
Centene--as well as Medicaid-focused rivals Amerigroup Corp. (AGP), Molina Healthcare Inc. (MOH) and Wellcare Health Plans Inc. (WCG)--saw their share prices surge in 2010 on expectations of a significant rise in Medicaid patients, prompted by last year's health-care overhaul law and the economic downturn.
"We are very focused on the next couple of years," Neidorff said during Centene's earnings call this week, citing "unprecedented demand" and "a full pipeline in 2011 and beyond." More details should come next week when the other three companies report quarterly results.
Medicaid will grow by more than 20 million people between now and 2015, WellPoint Chief Financial Officer Wayne DeVeydt said this week. "So clearly being in the Medicaid space and being in position for it is important," he said.
While Medicaid comprises only 5% of WellPoint's membership, the giant insurer is the second-largest Medicaid writer in the U.S. and plans to expand the business aggressively, DeVeydt said.
"We are going to go after all the contracts that are coming up. Now I'm not going to tell you which contracts, but there are many contracts coming up," he said.
Nonetheless, state budget issues may create headwinds for Medicaid managed-care companies this year, Goldman Sachs analyst Matthew Borsch said.
Several states are weighing cuts in Medicaid funding for the upcoming fiscal year. In Texas, for example, the state House last month proposed 10% cuts to Medicaid providers.
State budget pressures create a risk for Medicaid managed-care companies because tighter reimbursements to health plans can lead to margin pressure, especially if demand for medical services rebound this year from 2010's unusually weak levels, Borsch said.
In the week during which Texas made its proposal, shares of Centene, Amerigroup and Molina each fell at least 7%, a momentary stumble for stocks that rose 30% or more over the final 10 months of 2010. Since Jan. 24, the three stocks are each up at least 15%.
The continued share price momentum reflects the long-term belief that Medicaid growth is inevitable.
Centene's Neidorff noted that recent state budget proposals calling for tough Medicaid cuts are only preliminary, and he cited a "major trend" of states moving their highest-cost Medicaid beneficiaries into managed-care plans.
For example, he said, Illinois--a state facing steep budget issues--recently mandated that at least half of its 2.8 million residents eligible for Medicaid be enrolled in a care coordination program by 2015.
Jefferies & Co. analyst Arthur Henderson agreed with Neidorff. "While states already outsource just under 50% of their Medicaid caseloads to managed care, a trend of outsourcing more of the caseload is growing," the analyst said.
This week, Florida's governor proposed transferring the state's Medicaid beneficiaries into managed care.
Extra Medicaid funding from the 2009 economic stimulus bill will end the day before most states' fiscal 2012 starts on July 1, Standard & Poor's recently said. Meanwhile, the health-care overhaul requires states to expand Medicaid eligibility as of 2014. The federal government will pay for newly eligible Medicaid beneficiaries from 2014 through 2016, gradually decreasing support over several years.
"The Medicaid sector is heading towards one of the largest growth phases since the four pure plays went public," Wedbush Securities analyst Sarah James said. She added that the market was undervaluing Medicaid expansions and noted the stocks were trading earlier this week at a 16% discount to 10-year average price-to-earnings ratios.
-By Dinah Wisenberg Brin, Dow Jones Newswires, 215-656-8285; firstname.lastname@example.org