The outlook for commercial premium growth is sluggish; modest enrollment gains from the Affordable Care Act (ACA) and rising employment are offset by the rising tendency of beneficiaries to either buy cheaper policies, or forego coverage altogether
On top of this, the large ‘national account oriented’ commercial HMOs (e.g. CI, AET, WLP, UNH) stand to lose share of commercial beneficiaries, as employer sponsored beneficiaries move to the ACA’s exchanges or (more frequently) to private exchanges
Conversely, Medicaid is expanding; enrollment losses from rising employment are more than offset by more generous eligibility standards under the ACA; and by rising enrollment as states that have not participated in the expansion eventually choose to participate. Medicaid HMOs are gaining share of this growing population; and, average contract values stand to rise as dually eligible Medicare / Medicaid beneficiaries eventually enter HMOs
Importantly, we believe many of the Medicaid hold-out states would have expanded their programs to 100 percent of the federal poverty level (100 FPL) if Health and Human Services had agreed to pay the enhanced federal match on enrollees in these smaller expansions
Former Secretary Sebelius’ decision not to provide enhanced matching to partial expansions presumably was meant to encourage full expansions in most states, but this has not worked; more than 9 million Medicaid beneficiaries at or below 100 FPL remain on the sidelines in states that have not expanded. Former Secretary Sebelius’ policy was set to expire at the end of 2016, however we see some chance that the new Secretary nominee may choose to retire the policy sooner, bringing these additional 9 million beneficiaries into the program more quickly
We believe the relatively narrow difference between commercial and Medicaid HMOs’ valuations fails to reflect the broad differences in these subsectors’ growth prospects, and we conclude that the Medicaid HMOs are undervalued
For our full research notes, please visit our published research site.