Now it is a half year after Obamacare's individual mandate and we have a better but still foggy picture of heathcare. This is a good time for me to reevaluate WLP.
Obamacare affects Americans not just through its individual mandate. But the individual mandate is the most controversial and far-reaching part of the legislation. From what I see so far, the uninsured aren't dragged kicked and screaming to get coverage. And the new enrolees aren't just the sick and unprofitable members of the pool. I can tell because the Obamacare first year enrolment exceeded projections. And as further evidence, the California Obamacare insurers plan to raise rates 4.2%, which is less than the healthcare industry overall. This means that the first year rates were adequate and the enrolment mix had enough healthy to cover the unprofitable sick. Remember, Obamacare cannot discriminate the sick from the healthy with different rates.
Another controversial part of Obamacare is the Medicaid expansion. Medicaid expansion under Obamacare raises the level at which a person qualifies for Medicaid. However, each state can opt out if they wish because of the 2012 Supreme Court ruling. So far about half of the states have opted out. However, the most populous of the 14 states where Wellpoint does business are participating in Medicaid expansion. And Medicaid enrolment is up 15% this year compared to last in participating states. Wellpoint should be well positioned with its recent Amerigroup acquisition.
Joe Swedish has been all gung ho on Obamacare since joining Wellpoint more than a year ago. Preliminary facts looks like it will pay off. The medical loss ratio (MLR) is now at 82.7%. The MLR is the ratio of benefits paid to revenue. It is one of the key metrics to measure medical insurance companies. It was at 85% before he took over. And the company bought back 8 million shares in the last quarter alone. Mr. Swedish seems to be really focused on improving the company's bottom line.
Wellpoint recently has been the cheapest of the MCOs because of missteps before Mr. Swedish arrived. But the valuation is catching up. The following table compares all the major MCOs.
Wellpoint | Aetna | Humana | Cigna | Unitedhealth | |
Price | 111 | 78.3 | 120 | 91.67 | 81.5 |
PE | 12.6 | 12.0 | 16.0 | 12.6 | 14.7 |
ROE | 0.10 | 0.16 | 0.12 | 0.18 | 0.16 |
P/BV | 1.3 | 1.9 | 1.8 | 2.2 | 2.4 |
MLR | 82.7% | 83.1% | 83.1% | 84.5% | 81.6% |
Buying and selling stocks is a balancing act on a scale. In a perfectly efficient market the scale is balanced. I see possible future scenarios that would weigh in favour of holding WLP:
- Americans increasingly want health care, but are adamantly against government control. Obamacare increases in popularity.
- Healthcare has great pricing power, costs have been and will be rising significantly above GDP growth.
- Joe Swedish is the real deal, he will continue to improve the company's operations
- More Republican states accept Obamacare and actively participate (for example Medicaid expansion).
- Obamacare enrollment falls to below expectations and causes the enrollment mix to be more skewed towards the sick.
- The president who takes office in 2017 is Republicans and he repeals Obamacare.
- Joe Swedish slips and is not as good as the media makes him out to be.
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