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California Health Plan Sparks Concern, Promises Opportunity January 9, 2007

Posted by notapundit in Politics, US News.

California Gov. Arnold Schwarzenegger’s sweeping proposal to require health insurance for all the state’s residents could shake the U.S. managed-care industry, although it’s too early to know the exact effects.

WellPoint Inc. (WLP) traded lower Tuesday after analysts voiced concern that it could be hit by a requirement that a certain level of premium revenue be spent on patient care, although the managed-care giant also stands to benefit from the governor’s proposal.

Molina Healthcare Inc. (MOH) traded higher, as the Medicaid managed-care company is seen as a key beneficiary of the planned expansion of health-coverage for the poor in California.

The Republican governor introduced a plan Monday to require insurance for all Californians and help provide it for those who cannot afford it. The plan would extend coverage to some 6.5 million uninsured Californians, requiring that companies with at least 10 workers that don’t provide health benefits pay 4% of payroll to finance coverage.

Taxes on hospital and physician revenue also would help finance the program, which would require insurers to spend at least 85% of premium revenue on patient health bills and forbid them from rejecting applicants because of age or health condition.

So-called medical-cost ratios – the percentage of premium revenue used for patient bills – are the focus of intense scrutiny by managed-care shareholders, who like to see the figure kept in check to preserve profit margins. The 85% requirement, therefore, could be problematic.

“There are a lot of moving parts to the proposal, and it is in the very early stages. The broad sketch was consistent with what we expected, recognizing that details that will ultimately establish incentives and tradeoffs for the various parties have not been nailed down,” Merrill Lynch said in a note Tuesday.

The requirement that insurers spend 85% of premium dollars on patient care needs clarification, the firm said, adding that it’s unclear how much a provision would lower health-care costs. “We would be surprised if this piece of the proposal stays intact as is,” Merrill said.

The requirement for universal coverage could be problematic, Merrill said, as some individuals don’t buy insurance until they are sick enough to justify the monthly premium. “This diminishes the risk-pooling aspect of the insurance offering and brings it to more of a pay-as-you-go product, which can drive costs higher,” the firm said.

“This is a wide-reaching and very ambitious plan and the politics of seeing it through are very complex,” Merrill said, noting that the plan must be approved by a two-thirds majority of the state’s Democratic-controlled Legislature.

Deutsche Bank said the overall attractiveness of the program will probably depend on the managed-care companies’ ability to preserve margins in their California commercial books of business in the face of a potentially meaningful overhaul of the state’s market.

If approved, the plan could significantly improve enrollment growth prospects for California health plans, especially those with significant exposure to the state’s Medi-Cal program, such as WellPoint, Health Net Inc. (HNT) and Molina, Deutsche Bank said in a note.

Most commercial California health plans have medical-cost ratios below 85%, so the market will want to see whether the governor’s plan would erode commercial margins, Deutsche Bank said. Most plans already managed their state government Medi-Cal business to an 85% level, the firm said.

Deutsche Bank owns at least 1% of Health Net and WellPoint common stock and has a recent investment-banking relationship with WellPoint.

Goldman Sachs called it too early to make a definitive call in terms of effect on managed-care companies with significant California presence, as the details have not been provided and will be subject to extensive lobbying and negotiation.

“However,” Goldman added, “we would give better than 50/50 odds to enactment, in modified form, given the political momentum we think the governor will have on this issue.”

At first blush, the potential positive effects would include a more than 20% increase in the population of covered lives, including commercial and Medicaid business, and increase health-plan reimbursement under Medi-Cal. Very preliminarily, Goldman sees the program benefiting, in order of effect, Molina, Health Net, WellPoint and UnitedHealth Group Inc. (UNH).

The 85% medical-cost ratio requirement is a potentially significant down side for managed-care companies, probably hitting WellPoint the hardest, Goldman said, noting that the company has a medical-cost ratio of roughly 79% in California. The firm cautioned against a premature reaction, however, saying the details are unclear and it doubts there will be extreme winners and losers.

“What is clear to us is that it is likely there will be mixed impacts and `no free lunch’ if universal coverage in California and elsewhere becomes a reality,” Goldman said in a note. The firm has recent investment-banking relationships with Health Net, UnitedHealth and WellPoint, and expects to seek or receive compensation for such business in the next three months from them and from Molina. One of Goldman’s directors is a director of UnitedHealth.

CIBC World Markets said the Schwarzenegger plan would add almost $5.5 billion in new revenue for the health-insurance industry. Molina would be the clear winner, as the proposal would expand Medicaid coverage by more than a million individuals, CIBC said, while WellPoint seems most at risk from the potential medical-cost-ratio cap.

CIBC expects to seek or receive investment-banking compensation from Molina in the next three months.

Molina traded recently at $33.54, up $1.16, or 3.6%, and WellPoint was down $2.11, or 2.7%, to $76.85. Other managed-care stocks were off as well.

By Dinah Wisenberg Brin, Dow Jones Newswires


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