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WellPoint, Inc. (WLP), Aetna Inc. (AET): Three Managed Health Care Companies You Should Buy

Managed health care is an industry which is the most vulnerable to government policies. Recently, the Center for Medicare & Medicaid Services, also known as CMS, provided relief to this industry by announcing Medicare Advantage, or MA benchmark rates, for 2014, which will increase by 3.3%.

The benchmark rate is the maximum monthly amount which a plan can receive from its member. Earlier in February, CMS announced that these rates will decrease by 2.2%, which raised concerns for almost every managed health care firm. However, with the latest announcement, all companies providing Medicare advantage plans should show improved profitability in the future.

WellPoint, Inc. (NYSE:WLP)

Humana Inc (NYSE:HUM) is one of the biggest gainers, as it has an 80% exposure to MA. However, from investor’s perspective, I have given preference to those MA companies which are well diversified, and also have decent exposure to MA to make gains out of this positive trend. I have picked three companies —WellPoint, Inc. (NYSE:WLP), Aetna Inc. (NYSE:AET) , and CIGNA Corporation (NYSE:CI) — and analyzed their fundamentals and outlook.

Gaining upside with dual eligibility program

CMS recently announced that it has given approval to run dual eligible program in California. This trial program will be launched in October 2013, and will provide greater coverage to around 456,000 people who are eligible for both Medicare and Medicaid, due to their weak financial condition. Apart from California, there are 37 states which are in the process of considering dual eligible program.

WellPoint, Inc. (NYSE:WLP) is in a better position to monetize this opportunity. It increased its reach of Medicaid managed care business to 19 states with its acquisition of the Amerigroup in December 2012. This acquisition provides a huge opportunity from the perspective of dual eligibility market as out of these 19 states, 13 states have plans for the dual eligible program in near future.

The total spending by dual eligibility holders in these 13 states is expected to be $180 billion annually. It should be noted that WellPoint, Inc. (NYSE:WLP) has already won dual eligibility contracts in California, and is also bidding for New York. I expect this program will soon become an important contributor to WellPoint, Inc. (NYSE:WLP)’s portfolio with the combination of Amerigroup’s Medicaid platform.

On the other side, WellPoint, Inc. (NYSE:WLP) has a good track record of share buybacks and paying dividends. It has distributed over $10 billion in the last five years. Even after the acquisition of Amerigroup, it has not slowed down its share repurchase program, and it currently has $1.8 billion authorized for the same in 2013. Considering all these factors, I recommend buying this stock for long-term growth.

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