Will investors viewing Obamacare as a boon for health insurers regret their enthusiasm? Only time will tell if the law pays off for these companies, but recent developments suggest that some of health reform's purported benefits could be smaller than expected.
The backstory In the summer of 2012, the Supreme Court of the United States upheld the Affordable Care Act, with the only limitation being that states would reserve final say on whether to expand their Medicaid programs. But with the federal government committed to paying for the initial Medicaid expansion, it was clear at the time that most states would take advantage of the chance to expand coverage at no incremental cost. So, with the law upheld and set to take effect in 2014, insurance companies began planning their strategy to capitalize on a wave of newly insured Americans.
In a little over a month, two multibillion-dollar deals were announced. WellPoint, Inc. (NYSE:WLP) announced the acquisition of Amerigroup in June, and Aetna Inc. (NYSE:AET) followed up in July with news that it was acquiring Coventry Health Care, Inc. (NYSE: CVH). Both targets were seen as particularly attractive due to their large Medicaid and Medicare businesses, certain to grow because of Obamacare's Medicaid expansion and an ever-growing population of senior citizens.
About that expansion... Despite the "free" federal money backing Medicaid's expansion to 138% of the federal poverty level, not as many states as you might think are planning to take advantage. According to a report from The Advisory Board Company, as of the beginning of March more than half of states are either undecided on or against expanding the insurance program. While there is still plenty of time to play political hardball before 2014 hits, recent developments should have Medicaid-heavy insurers like WellCare Health Plans, Inc. (NYSE:WCG), Molina Healthcare, Inc. (NYSE:MOH), and Centene Corp (NYSE:CNC) at least a little concerned.