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Medicaid Expansion: Will It Happen and Who Will Benefit?

On June 28, 2012, the U.S. Supreme Court upheld the constitutionality of the healthcare reform law, the Patient Protection and Affordable Care Act of 2010 (ACA). However, the court rejected the portion of the act forcing states to expand their Medicaid programs to include citizens under age 65 with family incomes up to 138% of the Federal Poverty Level ($11,490 for a single person and $23,550 for a family of four). Failure to comply would have entailed a loss of all Medicaid funding. Under the ACA, states have the option to expand Medicaid eligibility which would be offset in full by federal funding for the first three years of the expansion, with funding gradually winding down to 90% by 2020. As of March 12, only eight of 30 Republican governors accepted the expansion of Medicaid eligibility requirements. Our belief is that with President Barack Obama's re-election, Republican governors now accept the inevitability of the ACA and would rather influence the reforms. Specifically, in the case of Medicaid eligibility expansion, some Republican-led states are following Arkansas Governor Mike Beebe (D). He wants U.S. Department of Health and Human Services (HHS) to allow states to use the federal Medicaid expansion funds to enable the new enrollees to purchase private insurance, which would be through the healthcare exchanges.

Gov. Beebe's plan was accepted by HHS. Florida Gov. Rick Scott (R) requested a waiver from HHS Secretary Kathleen Sebelius allowing the state to move nearly all Medicaid beneficiaries into private plans as a precondition for Florida's participation in Medicaid eligibility expansion. We believe that this request will likely be turned down or revised as Gov. Scott's policies have been hostile to the administration previously and as Gov. Scott is in a tough re-election campaign against a prominent Obama supporter former Governor Charles Christ (D). Virginia Gov. Bob McDonnell (R), Indiana Gov. Mike Pence (R), Iowa Gov. Terry Branstad (R) and Alabama Governor Robert Bentley (R) are also interested in Medicaid expansion, with new enrollees obtaining their insurance through private insurers, otherwise known as managed care organizations (MCOs).

This expansion of Medicaid eligibility will likely only benefit insurers such United Healthcare (UNH), Humana (HUM) and WellPoint (WLP). It will not significantly impact hospitals (such as HCA). These still suffer a very competitive environment, shrinking margins and no pricing power. Accretive advantages from bringing physicians from independent to employed status have already peaked with over 60% of the US physician workforce now employed by health systems, compared with approximately 20% a decade ago.

Another group of companies that will benefit are the consulting and big data firms. While many have been excited by the transition to Electronic Medical Records (EMR), this transition is already in its late phase and the explosive growth phase for companies like Cerner (CERN) are likely behind them (which creates a further headwind for companies like Allscripts (MDRX). However, companies like IBM (IBM), are entering the market. IBM has already teamed up with WellPoint to help physicians predict patient outcomes and is now partnering with the University of California at Los Angeles to test an experimental system that uses big data analytics software to predict changes in brain pressure and automats observations of multiple parameters. Lastly, the EMR changes are still an opportunity for Apple (AAPL). The move to EMR has entailed massive computer purchases, very few of which have been using any iOS device. Generally, physicians have been very unhappy with the quality of the mobile device that run the platforms and this creates an opportunity for Apple to eneter the healthcare emprise setting.