For Medicaid Managed-Care Companies, Opportunities Despite Risk

Ongoing state budget crises and eventual implementation of the health overhaul should mean a healthier environment for Medicaid managed-care companies, even though the industry faces funding risks as well.

Shares of Medicaid-focused health insurers have been pressured recently, reflecting investor concern over state budgets and Congress's failure so far to extend enhanced federal matching subsidies to states.

Nonetheless, companies like Amerigroup Corp. (AGP), Molina Healthcare Inc. (MOH) and Centene Corp. (CNC) stand to gain business as more budget-troubled states seek help keeping Medicaid costs down--and later, as millions more people gain coverage as a result of the health overhaul.

"While state budgets are still in terrible shape, we think Medicaid stock valuations will improve because it is one of the few areas of managed care with significant top-line growth potential over the next few years," Citigroup analyst Carl McDonald said Wednesday, initiating coverage of Amerigroup, Centene and Molina with buy ratings.

"States continue to turn to managed care to cover a greater number of enrollees, and health reform has the potential to boost the Medicaid population by over 30% in 2014," he said. "In addition, the Medicaid plans have a significant amount of net cash ... relative to their current market cap."

Medicaid plans may have to do with state rate increases that lag medical cost trends, although this shouldn't hurt stock valuations much, according to McDonald, who expects larger insurers to acquire pure-play Medicaid plans as a means to enter or expand their presence in the business.

In addition to gaining more Medicaid beneficiaries, the Medicaid managed-care companies also may compete for the business of individuals who receive subsidies to purchase private insurance in the state health exchanges that will be established by 2014, per the overhaul law.

Near term, state budget pressures provide both opportunity and risks for Medicaid managed-care companies, Deutsche Bank analyst Scott Fidel said.

"The clear risk is that Medicaid rates will remain under pressure in 2011-2012 while the opportunity is that the states will accelerate the migration of their Medicaid populations into managed care, strengthening the overall (bid request) pipeline," Fidel said. He expects the companies to benefit near-term from moderating medical cost increases.

Molina, Centene and Amerigroup all traded higher Wednesday, possibly on Citi's coverage announcement. Molina was up 9% over the past month, while Amerigroup was down 5% and Centene down about 5.4%. WellCare Health Plans Inc. (WCG), which also provides Medicaid plans, was up 1% late in the afternoon and down about 12% over the past month.

-By Dinah Wisenberg Brin, Dow Jones Newswires, 215-656-8285; dinah.brin@dowjones.com

Centene (NYSE:CNC)
Historical Stock Chart
From Jun 2024 to Jul 2024