Wednesday, July 3, 2013

Wellpoint and Obamacare Today

The White House announced today that the Affordable Care Act (aka Obamacare) would extend the deadline for medium to large companies to provide health insurance by one year; from Jan 2014 to Jan 2015.

This is an interesting development but I believe the Obamacare is proceeding mostly as planned. I have followed Obamacare closely because Wellpoint (WLP) is my biggest holding. The stock has run up 50% since the lows of last year. So, this stock is becoming an ever larger portion of my portfolio.

WLP is the managed care organization (MCO) with the largest number of individual subscribers. And Obamacare will have the biggest effect on uninsured individuals. The individual mandate will take affect Jan 1, 2014. As that day approaches, I pay more and more attention to WLP.

Coming in 2014, each state will offer an exchange for individuals to choose health insurance offered by private MCOs like WLP. I think the exchanges are ready for 2014 and will not be delayed like the company mandate. Parts of Obamacare have been in force since 2010, but the individual mandate is the most significant part of Obamacare for WLP because WLP is a large provider of individual insurance. And the mandate was challenged all the way the supreme court, but it survived. The individual mandate means an additional 30 million Americans who otherwise don't have insurance must either now go to an exchange to get one, or pay a penalty tax.

I see two big possible risks to WLP in the coming year. The first is fear of government oversight of the managed care industry which would restrict profits. One part of Obamacare dictates that the portion of premiums that at least 85% of premiums must go back to pay for costs (this is called the medical loss ratio). This law reminds me of the government's taxation of tobacco companies to pay for health problems resulting from smoking. The resulting effect of that law is actually greater market share by the dominate tobacco companies. This part of Obamacare, like other government regulation of businesses, will fatten the big dominant companies (like WLP) at the expense of the smaller ones, because of their greater scale.

The second is the possibility of losses from serving sick individuals who previously don't have health coverage. WLP voluntarily participates in the exchange system because it relies on individual customers for a large portion of its business. This is a known issue and WLP, like all participants, enter exchanges with their eyes wide open. They should be able to judge the risks and begin conservatively. Also, the biggest positive is that the government designed the individual mandate to spread out the risk by forcibly adding a previously uninsured pool of 30 million people.

Getting a Bigger Piece of the Pie

When I invest I like to think contrarian and not overweight headlines. With MCO companies the statistics and information about demographics and costs can be overwhelming. I think the market tends to get too caught up in the numbers while failing to look at the big picture. The bottom line is the US spends 17% of GDP on healthcare. And much of that 17% goes through MCOs. The following illustrates the coverage of all people in the US. As one can see 69% of people are covered by MCO. About 16% are uninsured, and time will tell how much of this 16% will participate under Obamacare, maybe 8%? maybe 10%. The other 15% are various government agencies such as Medicare and Medicaid. But both of those have private MCO options. At the time the chart was made, in 2010, 12 million people use Medicare through MCOs, by 2015, it is projected to be 16 million. So the MCOs are eating into the government's piece of the pie, and the government is ok with it! In any other industry where the market is growing by millions of customers per year, the market would drool. But, it doesn't seem so with managed care.

Health Coverage for all US Persons

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