Whew! Supreme Court Upholds Healthcare Reform

June 28, 2012

Here’s the link to the decision–a 5-4 ruling with Chief Justice Roberts the tiebreaker–that upholds ObamaCare, including the individual mandate.  The ruling does put a limit on the government’s ability to enforce the Medicaid expansion, noting that the federal government can’t withhold a state’s entire Medicaid funding as punishment if the state decides not to implement the expansion.  

“It is likely that at least some of the most dogmatic Republican states will consider opting out despite the fact that the federal government is picking up 100% of costs through 2016 and 90% beyond,” says Justin Lake of J.P. Morgan.  Florida and Texas would be two states to watch. 

Either way, the ruling is viewed as positive for managed Medicaid stocks.  “There’s joy in the Medicaid world today,” says Carl McDonald of Citi.  In morning trading, pure-play Medicaid health plan stocks are up considerably (Amerigroup, +4%; Centene, +4%; Molina, +4%; and WellCare, +9%). 

However, diversified health plans are way down (Aetna, -5%; Cigna, -5%; Coventry, -3%; Health Net, -4%; Humana, -3%; and WellPoint, -6%).  Christine Arnold of Cowen notes that companies like Aetna, United and WellPoint had the most to gain if the court struck down the individual mandate, guaranteed issue and community rating–which threaten profit margins in the individual and small group markets.

Overall, I like Austin Frakt’s comments on the ruling:

Though the Supreme Court’s ruling on the ACA has many implications, what its focus on the law doesn’t do by itself is make progress on the problems of cost, quality, and access in our health care system. Those problems remain in approximately the same state they were in when the ACA was passed in 2010. That law is an attempt to begin to address each of them, to various degrees and over time. But even its strongest advocates know it is only a first step. If health reform is to be further advanced, it will be through legislation, not litigation.

I also enjoyed a sound bite I heard on the radio (sorry, I didn’t catch the speaker’s name) that the ruling means healthcare in the U.S. will be more like the National Football League than Major League Baseball.


Lake Is “Modestly Constructive” on Health Plans

June 19, 2012

Justin Lake (formerly of UBS and now of J.P. Morgan) says he has a “modestly constructive” outlook on health plans.  Not exactly a ringing endorsement, but given all the uncertainty, an understandable one. Lake has initiated coverage of the sector with buy ratings on Amerigroup, Centene, Cigna and UnitedHealth.  He has hold ratings on Aetna, Coventry, Health Net, Humana, Molina and Humana.  He has no sell ratings.

Concerns on cost trend acceleration will prove unfounded with our not for profit industry conversations and hospital/physician data indicating no pickup. While the Supreme Court decision adds uncertainty, we think it is outweighed by potential positive…November elections as well as government driven growth opportunities….That said, we see little upside to Q2 numbers while earnings visibility moderates as cost trend flattens.

McDonald on WellPoint Purchase of 1-800 Contacts

June 12, 2012

If WellPoint took $900 million and used it to repurchase stock, it would add $0.35 in accretion in 2013, after factoring in lost investment income/higher interest expense. Alternatively, if the company paid a $900 million special dividend, it would give shareholders $2.75 per share in cash, providing an instant 4% return to a stock that dramatically underperformed United in both 2010 and 2011, and has appreciated just 2.4% this year, relative to a 13.7% return at United.

Instead, WellPoint chose to spend $900 million to buy 1-800 Contacts. For comparison purposes, WellPoint paid $800 million to acquire CareMore, the Medicare plan in California. We’ve used the 1-800 Contacts website before, and had a good experience with it. It seems like a good business, but financially, this is a hard deal for us to understand, unless WellPoint has an extraordinary amount of visibility into how it can grow the revenue of the acquired business by around 75% in a relatively short period of time.

Managed Medicaid Blues. Centene’s Turn

June 11, 2012

Happy Monday.  Shares in Centene are down 29% in pre-market trading after the company announced poor financial performance in Kentucky; Hidalgo County, TX; and its Celtic individual business.  This comes as no surprise following Molina’s announcement of problems in Hidalgo.  Centene also slashed its 2012 earnings outlook by 43% to between $1.45 and $1.65 per share.

Welcome to the Molina Rollercoaster

June 8, 2012

Troubles in Texas: shares fall 31% yesterday. Lose Ohio account: shares fall 27% on April 9. Win back Ohio after protest: shares up 20% today in pre-market trading.  We all knew that the growing managed Medicaid market would have it’s ups and downs–but this is a bit extreme.

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