Why Every State Will Ultimately Expand Medicaid

Bottom Line: Medicaid expansion remains a politically charged topic, evidenced by Republican led states making up the majority of those choosing not to expand at this point. However, in this note we lay out some of the arguments and considerations that we believe will ultimately drive all states to expand Medicaid.

Admittedly, timing is difficult to predict although we would expect pressure to heat up post mid-term elections. Incremental news of greater state expansion, particularly in FL and TX, would bode well for the entire publicly traded hospital/provider sector (most positive for HCA and CYH) as well as selective managed care companies (CNC and MOH) with greater exposure to those states.

Funding Argument: Simply put, the gov't is funding 100% of Medicaid expansion through 2016, scaling down to 90% in 2020+. While the initial ACA backlash may have provided cover for states not to expand, we believe it may be increasingly difficult to continue to defend not taking the federal money to insure a significant population base within each respective state.

Access Argument: Given the laws of the ACA, most states that choose not to expand are leaving a significant coverage gap. This happens because subsidies on the exchange are available down to 100% (and up to 400%) of FPL, but not below that level. This leaves a low-income population paying significantly more for healthcare coverage. We provide examples below and believe that better understanding of these dynamics will fuel further political pressure on states from various constituencies and advocacy groups.

TX Example: In an example in Texas, an individual making $18,000 a year has access to $0 premium health insurance, while someone making $10,000/yr (below 100% FPL) would have a $150/month or $1,800/year premium (18% of gross salary). Another way to look at this example is that someone making ~$30,000 in TX has access to cheaper healthcare coverage than someone making $10,000.

FL Example: Florida provides a more magnified example where someone making $21,000 would have access to a $0 premium plan while someone making $10,000 (below 100% FPL) would have to pay $177/month or $2,100/year, and would pay more for healthcare than someone making up to $34,500. Additionally in the FL example, someone making $15,000 could access a zero premium Silver tier health insurance plan as opposed someone making $10,000 that would have to pay $240/month or $2,874/year for the same exact plan.

-- R. Giacobbe, Credit Suisse First Alert, May 21, 2014