WellPoint's $5 Billion Bet on Obama's Re-Election?

WellPoint's $5 Billion Bet on Obama's Re-Election?

Did large health insurer WellPoint (NYS: WLP) just bet nearly $5 billion that Barack Obama will be re-elected?

The company recently announced a proposed acquisition of Amerigroup (NYS: AGP) , a managed care company focusing largely on Medicaid. The announcement came on the heels of the Supreme Court's decision to uphold most of the Affordable Care Act (a.k.a. Obamacare).

However, the court ruled that penalties for states that refuse to expand Medicaid are unconstitutional. Several state governors have indicated that they will wait until after the November presidential election to decide whether to go along with the Medicaid expansion. If Mitt Romney wins, he has promised to dismantle Obamacare.

Is WellPoint gambling on the election outcome? Not really. Here are two reasons why.

Inevitable growth
Medicaid seems destined to grow regardless of whether states expand their programs for Obamacare. Government actuaries project that Medicaid enrollment will increase 34% more by 2019 under Obamacare than it would otherwise. This means that Medicaid should grow over 3% annually even if Obamacare is ultimately dismantled.

This growth makes sense, especially when you look at the following charts.

Source: Centers for Medicare and Medicaid Services.

Source: Centers for Medicare and Medicaid Services.

Source: Department of Health and Human Services -- Administration on Aging.

Source: Department of Health and Human Services -- Administration on Aging.

Aged members currently make up less than 10% of Medicaid enrollees, but they account for more than 22% of Medicaid expenses. With the projected growth of the older population in the U.S., these numbers seem likely to increase. If high unemployment levels continue for years -- as the majority of economists believe it will, according to a recent Associated Press survey -- the number of needy families could also add to Medicaid rolls.

How do increasing Medicaid numbers benefit Amerigroup? Among the company's members, 86% are in its Medicaid programs. As Medicaid grows, so do Amerigroup's prospects.

State Medicaid blues
More good news for WellPoint and Amerigroup stems from bad news for the states. Medicaid accounts for an estimated 23.6% of all state expenditures. With many states facing serious financial challenges, all but three states have latched on to managed care programs as a way to control costs.

Several companies compete for the states' Medicaid business. Amerigroup currently contracts with 11 states for Medicaid managed care programs. WellPoint has Medicaid contracts with 10 states. UnitedHealth Group (NYS: UNH) serves 23 states with its Medicaid programs. Centene (NYS: CNC) and Molina Healthcare (NYS: MOH) have contracts with 13 and nine states, respectively. The count of states is more than 50 because several states contract with multiple Medicaid managed care organizations (MCOs).

WellPoint and Amerigroup don't necessarily have to win contracts from other competitors to grow. Many states still allow enrollment in managed care programs to be voluntary. The population not in managed care presents opportunities for growth for all of the MCOs.

All of these companies could be successful over the long run if they save money for the states. How successful have they been thus far? It depends on whom you ask. Jason Helgerson, Medicaid director in New York, believes that managed care saves money if done right. On the other hand, Georgetown University's Joan Alker says that "there is no good evidence, at least so far, that Medicaid managed care saves money or improves access to medical care."

What matters for now is that many states are banking on these savings. And they are doing so regardless of who occupies the White House.

Risks remain
While WellPoint doesn't seem to be wagering on who will win the presidency, the company is still taking risks with the Amerigroup acquisition.

One risk is its ability to control costs. Higher-than-expected medical costs recently forced Centene to revise its earnings guidance for 2012 downward by more than 40%. Molina Healthcare withdrew its 2012 earnings guidance in June because of "uncertainties" surrounding medical costs. Amerigroup reaffirmed its 2012 guidance and UnitedHealth increased its guidance, but the difficulties of their counterparts illustrate the challenges that all MCOs face.

Another risk is that WellPoint could be simply paying too much. The highest average price-to-earnings multiple for Amerigroup over the past 10 years was slightly over 15. WellPoint's offer of $92 per share translates to a P/E roughly double that previous high.

Favorable odds
The prospects for growth in the Medicaid managed-care market seem promising regardless of who wins in November. How can investors capitalize? Focus on the company with solid growth potential that is trading at the most attractive price.

That company appears to be UnitedHealth. It stands to benefit over the long run from growth in Medicaid and its other business segments. The stock has a forward P/E of less than 10. While any investment carries risk, buying UnitedHealth should be the best alternative for putting the odds in your favor.

WellPoint doesn't seem to be really betting on the election outcome, but some stocks are poised to get a bump depending on who wins in November. Check out The Motley Fool's special report "These Stocks Could Skyrocket After the 2012 Presidential Election." Get your copy of this free report.

The article WellPoint's $5 Billion Bet on Obama's Re-Election? originally appeared on Fool.com.

Fool contributorKeith Speightshas no positions in the stocks mentioned above. The Motley Fool owns shares of WellPoint.Motley Fool newsletter serviceshave recommended buying shares of WellPoint, Amerigroup, and UnitedHealth Group and creating a diagonal call position in UnitedHealth Group. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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