The Medicaid Money-Making Machine


Could Medicaid be a money-making machine for some? Follow the money. That's what the secret informant known as Deep Throat told investigative journalist Bob Woodward in the movie All the President's Men. We take Deep Throat's advice below and follow the money to see who could be benefiting from the billions of dollars flowing into the huge federal-state health care program.

From you to Uncle Sam
The money trail starts with you -- if you pay federal taxes. Taxpaying Americans gave $2.2 trillion to Uncle Sam in 2011. Of course, Uncle Sam also borrowed another $1.3 trillion to feed his spending addiction.

And $275 billion of that total went to Medicaid. That's nearly $0.13 out of every dollar you sent to Washington. The amount of money going to Medicaid is expected to rise at an annual rate of 9% per year, by the way. The $275 billion spent in 2011 will more than double by 2021 using current growth projections.

From Uncle Sam (and you) to the states
Washington doesn't keep the money for long. The feds distribute the funds intended for Medicaid back to the states. Medicaid and the Children's Health Insurance Program, or CHIP, make up the single largest item given by the federal government to states.

States must match federal dollars for Medicaid based on per-capita income. Wealthier states split the costs 50/50 with the feds, while poorer states only pay 25% of the total Medicaid cost.

That's where you come into the picture again. Regardless of how wealthy or poor your state is, you provide more money for Medicaid through income taxes (in many states), sales taxes, or other types of taxes and fees.

From the states to...
Medicaid costs in fiscal 2011 are estimated to make up 23.6% of total state spending, making Medicaid the largest line item in state budgets. States are looking for ways to control these costs.

One major avenue for doing so is using managed care programs. In fiscal year 2012, 18 states expanded Medicaid managed care programs. And 20 states expect to expand the use of managed care in Medicaid in fiscal 2013. U.S. government figures showed that more than 74% of Medicaid enrollees were in managed care programs in mid-2011. That number continues to grow.

Where is the managed care Medicaid money from the states flowing? Take a look.

Source: Mark Farrah Associates using CMS, NAIC and CA DMHC data.

The biggest beneficiary of the Medicaid managed care money flow is UnitedHealth Group . The health care giant reported revenue of $13.8 billion in 2011 and $11.3 billion for the first nine months of 2012 from its Community and State business unit, which includes Medicaid. UnitedHealth's Medicaid enrollment jumped 11% in the third quarter compared to 2011.

Amerigroup comes in second with a 4.8% market share. However, WellPoint will soon acquire the company now that the Justice Department has approved the deal. The two companies' combined total for Medicaid managed care will rival the market share of UnitedHealth.

Centene , Molina Healthcare , and Wellcare round out the top six Medicaid managed care organizations, or MCOs. All three companies experienced solid growth in 2011. Centene increased its Medicaid MCO revenue by nearly 21% compared to the previous year to $4.5 billion. Molina's Medicaid MCO revenue jumped 15% in 2011 to $4.6 billion. Wellcare grew its Medicaid revenue to nearly $3.6 billion, up 8% from 2010.

The remaining 74% of the market is split over many smaller players. This fragmentation represents significant opportunities for the bigger MCOs to expand in addition to increasing revenue from higher managed care participation rates.

Happy trails?
Is there a chance that the money trail that began with you could also end with you? Investing in the Medicaid MCOs gives you a decent shot. The chart below shows how the stocks fared over the past year.

Source: Motley Fool CAPS.

Amerigroup's huge gain came as a direct result of the pending acquisition by WellPoint. Shares of Molina, Centene, and UnitedHealth performed nicely also. Wellcare and WellPoint didn't fare nearly as well, although WellPoint's 2.1% dividend yield helps a little. UnitedHealth's 1.1% yield also adds somewhat to its attractiveness. None of the others pay dividends currently.

With enrollment rolls swelling, managed care should continue its appeal for cash-starved states. The Medicaid money-making machine seems likely to keep churning for managed care companies. Following the money could lead to happy trails for savvy investors.


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Fool contributor Keith Speights has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend UnitedHealth Group and WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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