uploads/2016/01/Graph-341.png

Government-Sponsored Programs Expected to Drive Aetna’s Revenue

By

Updated

Government-sponsored programs

Government-sponsored programs such as Medicare and Medicaid are expected to be key drivers of Aetna’s (AET) revenue growth in 4Q15. Aetna’s performance in the Medicare business has been consistently strong in the first three quarters of 2015. The company increased its total Medicare membership by about 11% on a year-to-date (or YTD) basis.

In 2015, on a YTD basis, Aetna also witnessed a 14% rise in the total members enrolled in its Medicare Advantage (or MA) plans. To know more about Aetna’s government-sponsored business, please refer to Aetna’s Government-Sponsored Business Accounts for 38% of Revenue.

The above diagram shows that according to Aetna’s projections, its MA segment offers the best combination of revenue growth as well as long-term margins. Although Medicaid and duals also contribute to Aetna’s revenues, they generally earn low profit margins.

Article continues below advertisement

Factors driving Medicare performance

On April 6, 2015, the federal government announced that MA payments will rise by about 1.3% year-over-year (or YoY) in 2016. This is also expected to boost government revenues of other health insurance companies such as Humana (HUM), UnitedHealth Group (UNH), and Anthem (ANTM).

To further expand its Medicare business, Aetna has planned to increase its geographic presence. It has decided to offer Medicare products in 745 counties in the United States in 2016. Compared to its national peers, Aetna also scores the highest in MA plan quality, with 87% of its Medicare members enrolled in plans with four or higher MA star ratings. These members represent about half of the total Medicare-eligible members in the United States.

Medicaid performance

Aetna has also reported strong membership growth in the Medicaid business. It enrolled about 86,000 people mainly due to the Affordable Care Act (or ACA) Medicaid expansion. This has enabled Aetna to earn solid operating margins in its Medicaid business, despite slower growth in its duals program and a decline in payment rates in the Kentucky Medicaid contract.

The company will also witness further membership growth due to recently awarded contracts such as the Michigan Medicaid contract and the Texas STAR Kids program. To know more about Medicaid expansion, please refer to Why Medicaid expansion leads to better hospital performance.

You can get exposure to Aetna through the iShares Core S&P 500 ETF (IVV). Aetna accounts for 0.23% of IVV’s total holdings.

Advertisement

More From Market Realist