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Will Health Insurers Win Under Obamacare Replacement Plan?

Zacks Equity Research

The much-awaited repeal and replace plan pertaining to Obamacare has finally been disclosed. Trump’s “The American Health Care Act” largely replaces Obamacare. During his campaign, Trump was vociferous about bringing changes to Obamacare. He had even called the former president’s signature achievement treacherous and a nightmare.

Last month, Trump told the Congress that his replacement of Obamacare will expand choice, increase access, lower costs, and at the same time provide better health care.

The Changes

The new plan includes age-based refundable tax credit to help individuals buy insurance and expands Heath Savings Account. The plan also puts an end to the individual mandate that required every individual to have health insurance or face a penalty. It also relaxes the requirement by businesses to offer coverage to their workers. Though the individual mandate provision has been stripped off, it will levy a penalty on individuals who fail to maintain coverage continuously.  

The provision includes restructuring the Medicaid program by giving the states a block aid for Medicaid instead of open-ended funding under Obama. Open-ended funding provided greater flexibility to the states to manage their Medicaid program, the premiere health insurance program for low-income Americans.

Open-ended funding, by both federal and state governments, led to Medicaid expansion and brought more than 20 million people in the U.S. under the insurance net. If a state falls short of funds like in the case of excess expenditure on Medicaid, it can turn to the federal government for extra funding.

The provision calls for cutting Medicaid funding by  giving a block of fund to each state after which the states will be on their own, without recourse to federal funds in case of a  shortfall. This will take away their flexibility. It is being widely anticipated that in order to manage their funds, the state governments might cut off benefits under Medicaid, impose premium or make other changes such as elimination of subsidies that would make Medicaid unattractive and drive people away.

The individual mandate and Medicaid expansion under the Affordable Care Act (ACA) provided coverage to nearly 25 million people. A repeal of this is expected to leave 20 million people uninsured.

A threat to ACA’s individual mandate provision and Medicaid expansion spell trouble for companies with Medicaid-centric business such as Molina Healthcare Inc. MOH, Centene Corp. CNC and WellCare Health Plans, Inc. WCG. The stocks of these three companies have suffered the most since Nov 9, 2016, the day when the outcome of election was revealed.
But some of the provisions that had bipartisan support have been kept intact. These include maintaining coverage for people with pre-existing conditions and allowing children to stay on their parents' plans until the age of 26.

Effect on Health Insurers

While retaining the pre-existing conditions clause might hinder health insurers’ business, their ability to charge a penalty on those who fail to maintain coverage is being seen as a positive. Also, the provision to sell plans across state lines and Trump’s tax credit proposal, which will presumably keep consumers in the market, are being appreciated.

Health insurers who had a bitter experience with individual exchanges are hopeful that the new provisions would give them more flexibility to offer lower cost plans and greater flexibility with regards to age. This will help in drawing the younger and healthier population to the insurance net and in turn improve the risk pool. Big players like UnitedHealth Group Inc. UNH, Anthem Inc. ANTM, Aetna Inc.AET and Humana Inc. HUM are hopeful of an improved operating environment in the post Obamacare era.

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Aetna Inc. (AET): Free Stock Analysis Report
Humana Inc. (HUM): Free Stock Analysis Report
Molina Healthcare Inc (MOH): Free Stock Analysis Report
UnitedHealth Group Incorporated (UNH): Free Stock Analysis Report
WellCare Health Plans, Inc. (WCG): Free Stock Analysis Report
Anthem, Inc. (ANTM): Free Stock Analysis Report
Centene Corporation (CNC): Free Stock Analysis Report
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