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.
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.
Sums of inorganic growth
Aetna Inc. (NYSE:AET)’s subsidiary Schaller Anderson and its joint venture with Mercy Maricopa recently got a $1 billion contract from the State of Arizona. Under this contract, Mercy will cover the benefits of around 68,000 people. Although this contract is a big win for Mercy, it’s not going to be a huge deal for Aetna Inc. (NYSE:AET), as its role will be restricted as an administrator only.
Aetna will receive fees for administration, whereas the premium will be kept by Mercy. From Aetna’s perspective, this deal will only be an addition to its already diversified portfolio. Aetna Inc. (NYSE:AET) will get around $100 million per year from the administration of this program.
On the other hand, it is on the verge of completing its pending acquisition of Coventry Health Care, Inc. (NYSE:CVH). Till now, it has received approval from 20 states out of 21 for this acquisition. This acquisition is would be highly accretive for Aetna, as it will enhance its footprint in government payment systems.
Additionally, Coventry Health Care, Inc. (NYSE:CVH)’s strong presence in individual Medicare advantage will supplement its focus on growth in group Medicare advantage plans. Coventry Health Care, Inc. (NYSE:CVH) is expected to contribute $0.45 to Aetna Inc. (NYSE:AET)’s EPS in 2014. Combining this with the recent CMS Medicare advantage fees revision which will improve profitability, I recommend buying this stock.
An investor’s paradise either ways
With the acquisition of HealthSpring in January 2012, CIGNA Corporation (NYSE:CI) forayed into the fast growing Medicare advantage segment. This acquisition is providing $30 million in annual cost synergies. Most of the cost synergies from this acquisition were realized in 2012, but improvement in profitability was not observed because of the integration costs.
In 2013, the company should see improvement in its bottom line due to this acquisition. CIGNA Corporation (NYSE:CI)’s & HealthSpring’s Medicare program currently accounts for around 23% of its total earnings. With the announcement of the CMS cost revision, the company should show good results in the coming time.
CIGNA Corporation (NYSE:CI) is assessing the fate of its pharmacy benefit manager, or PBM business, and will take a decision by June 30. If it elects to retain the PBM business, it is expected that it would contribute around $325 million annually. And even if it goes for divesting this business, it is estimated that it would fetch around $3.2 billion.
In any case, investors would be benefited in the form of dividends or share buyback. Till now, the company has pending repurchase authority of $815 million, which I feel will be done once the decision on PBM is taken.
Conclusion
Medicare advantage price increase is a positive catalyst for all these three companies.
WellPoint, Inc. (NYSE:WLP) has a huge opportunity from dual eligibility plans, whereas Aetna Inc. (NYSE:AET) will grow from its increased Medicare portfolio including both group and individual plans.
On the other hand, CIGNA Corporation (NYSE:CI)’s pending decision on its PBM business will reward shareholders either in the form of a buyback or increased dividend. Taking these points into consideration, I recommend buying all three stocks.
The article 3 Managed Health Care Companies You Should Buy originally appeared on Fool.com is written by Madhu Dube.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
