The Zacks Analyst Blog Highlights: Centene, WellCare Health Plans, Molina Healthcare and UnitedHealth Group

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Dec 22, 2014, 09:30 ET

CHICAGO, Dec. 22, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Centene Corp. (NYSE:CNC-Free Report), WellCare Health Plans, Inc. (NYSE:WCG-Free Report), Molina Healthcare, Inc. (NYSE:MOH-Free Report) and UnitedHealth Group Inc. (NYSE:UNH-Free Report).

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Friday's Analyst Blog:

Obamacare Expansion: 2 Health Insurers to Benefit

Insurers have long viewed the President's signature Affordable Care Act as a roadblock in their operations, since the reform imposed taxes, fees and a number of regulations, and had the power to cut payment rates and cap profit margins.

As a silver lining, newer avenues of growth opened up. Overtime, the relationship between the Obama administration and insurers has morphed into something mutually beneficial and lucrative. The partnership has turned crucial to the success of the country's biggest healthcare plans. It has also fuelled the sharp increase in Medicaid enrollments, which are profitable for insurers.

Health Reform Medicaid Expansion: Major Growth Opportunity

The managed care plans have benefited from Obamacare's Medicaid Expansion which went into effect in Jan 2014, one of the biggest milestones in health care reform. The provision has made available billions of dollars in Medicaid revenues along with increased enrollment in the managed care plans. Obamacare's Medicaid expansion covers nearly half of the uninsured Americans who are perhaps also the poorest and seeks to cater to as many as 17 million patients.

Forbes recently stated that according to a report from PricewaterhouseCoopers, the Medicaid benefits for poor Americans, courtesy of the Affordable Care Act, helped private managed care plans increase enrollment by 9.3 million people.

Per the report, private-managed Medicaid coverage may just have reached the tipping point in 2014. Overall Medicaid enrollment grew by 9.0 million lives, and private-managed Medicaid health plans saw 9.3 million added.

In other words, Americans under private-managed care plans grew by 9.3 million while those opting fee for service or public managed care (like primary care case management) were 300,000 less in number.

In total, 43.5 million Americans received Medicaid coverage from private health plans, or 66% of all Medicaid beneficiaries, up from 59% last year. The total number of Americans receiving Medicaid coverage from private health plans is thus 43.5 million, or 66% of all Medicaid beneficiaries, 59% higher than last year.

The above-mentioned finding points to increased penetration of managed care in government programs as states turn to private insurers to help manage Medicaid benefits. States have no option but to take help from private players as they continue to face fiscal challenges and surging Medicaid demand. States are using health plans as a platform for expansion because of their track record of controlling costs in public coverage programs while improving the quality of and access to care.

Health insurance companies traditionally, however, were not willing to cover Medicaid recipients, because of complex medical needs which ultimately made them less profitable for insurers.

But a rapid shift is evident in the attitude of the health insurers toward the Medicaid population as the states rely greatly on managed care for Medicaid. Some of the plans seek cost control by limiting a patient's choice of physicians and the fees that doctors charge. Some health insurers cover Medicaid patients in return for a flat monthly payment from the government.

Moreover, federal spending on Medicaid managed care is expected to increase 39% from $74 billion in 2013 to $103 billion in 2015, according to the Congressional Budget Office. The higher federal spending, as well as the enrollment of 13 million people in new insurance marketplaces, makes it more attractive for health plans to offer government-financed coverage. Developing Medicaid business also provides diversification benefits to health insurers.

The Medicaid market is still fragmented and we expect further consolidation in the space. The next best targets in our view are top Medicaid insurers – Centene Corp. (NYSE:CNC-Free Report) and WellCare Health Plans, Inc. (NYSE:WCG-Free Report) and Molina Healthcare, Inc. (NYSE:MOH-Free Report). For potential buyers, these plans with a vast exposure to Medicaid seem lucrative.

Two Stocks to Consider

Going by the current scenario, these two players under our coverage look attractive and have huge growth potential. We expect these players to drive revenue growth from Medicaid business which will eventually translate into higher earnings. This apart, these players sport favorable Zacks Ranks and high EPS growth rates.

Our first pick is UnitedHealth Group Inc. (NYSE:UNH-Free Report). This stock carries a Zacks Rank #2 (Buy) and has an expected EPS growth rate of 10.3%. Medicaid growth was a significant driver of the company's year-to-date performance and future growth of federal funding.

Medicaid enrollment was the strongest in the third quarter, growing 24% year over year, and Medicaid revenue increased 34% year over year. Medicaid revenue made up 18.1% of total revenue, up from 14.9% in the prior year.

The company remains on track to add just under 1 million new Medicaid clients this year with about 60% coming from ACA market expansion and 40% from established states under new programs. Over time, Medicaid should remain a growth opportunity as more states embrace Medicaid expansion and take advantage of it.

Our second pick would be specialty insurer Centene,with a Zacks Rank #1 (Strong Buy) and EPS growth rate of 17.8%. The company is more directly exposed to the benefits of Medicaid expansion given that the plan represents the majority of the company's members.

Analysts project that by 2015, sales at Centene will rise faster than every other managed care provider in the U.S. Earlier this month, the insurer projected better-than-expected sales and profits for 2015 as it signs on more Medicaid members.

Bottom Line

Obamacare has thus far been favorable for the health insurers. After the initial hesitation, the government and health insurers are getting along well. Importantly, the current changing environment and the players' adaptation to it, is integral to their long-term growth. Since the stocks mentioned above well reflect this new adjustment, we recommend adding them to your portfolio.

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

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