AMERIGROUP (NYSE: AGP) provides health insurance to recipients of Medicaid and other publicly sponsored healthcare programs. In exchange for a monthly subscription premium (fee), AMERIGROUP members get access to an approved network of healthcare providers. Since AMERIGROUP members rely on public healthcare programs, the company gets premium revenue directly from state and federal governments. The company’s primary operating cost is paying its healthcare provider network for handled cases.
AMERIGROUP’s membership pool, which made up 99.4% of AGP's 2009 revenues, grows and shrinks with the number of Medicaid enrollees nationwide. Medicaid enrollment is expected to increase in the short term as the economic recession increases unemployment, reducing the number of people on employer-provided health insurance, and lowers incomes, increasing the number of people meeting Medicaid eligibility requirements. Even a 1% increase in unemployment will increase Medicaid enrollment by 1 million people. In the long term, Medicaid enrollment will also likely increase, as aging baby boomers turn to government programs for long-term medical support.
At the same time, Medicaid funding levels and eligibility standards are subject to change based on available government resources. While Medicaid enrollment tends to increase during economic recessions, state tax revenue decreases, often forcing abrupt cutbacks in program size and expenditures. At any given time, AMERIGROUP’s revenue depends primarily on two factors: the size of its subscription pool and the government’s willingness to pay subscribers’ healthcare premiums.
AMERIGROUP, a managed healthcare company, insures people who participate in government-subsidized healthcare programs, including Medicaid, State Children’s Health Insurance Program (SCHIP), and Medicare Advantage. However, over three quarters of the company's subscribers are enrolled on Medicaid. In exchange for a monthly subscription premium, AMERIGROUP connects its members to a healthcare provider network of approximately 82,000 physicians and 640 hospitals across 11 states. To enter new markets, AMERIGROUP bids for contracts with state governments, to be recognized as a Medicaid managed care organization, and with local healthcare professionals, to establish a provider network for potential subscribers.
Since AMERIGROUP members rely on public healthcare programs, the company's premium revenue comes directly from state and federal governments. The company’s primary operating cost is paying its healthcare provider network for handled cases. 
AMERIGROUP’s revenue has increased steadily over the last three years, reflecting membership growth and geographic expansion. While each state government distributes Medicaid premiums along different criteria, more members bring AMERIGROUP more premium revenue. Premiums consistently make up 98-99% of revenue, with the remaining 1-2% coming from investments.
The company can only profit by calibrating its risk to ensure that subscription premium exceeds healthcare payments. This relationship is summarized by the Medical Loss Ratio (MLR), the ratio of medical expenses to premium revenue.
The company has been licensed as a Health Maintenance Organization (HMO) in 9 states, a Health Insurance Corporation (HIC) in Ohio, and a Prepaid Health Services Plan (PHSP) in New York.
In 2009, AGP earned total revenues of $5.2 billion, a substantial increase from its 2008 revenues of $4.5 billion. As a result, AGP's net income was positively affected. Between 2008 and 2009, AGP went from a net loss of $51 million in 2008 to a net profit of $149 million in 2009.
Medicaid enrollment grew 2.1%, causing a nationwide spending increase of 5.3%. According to a nationwide survey, Medicaid directors anticipate even greater growth in the upcoming fiscal year, projecting 3.5% enrollment increase and a 5.8% spending hike. More people begin to rely on Medicaid for health coverage during economic recessions, as they lose their employment insurance and/or meet Medicaid eligibility standards by dropping into a lower income bracket. Even a 1% increase in the national unemployment rate would cause Medicaid and SCHIP enrollment to grow by 1 million people, requiring $3.4 billion in additional state and federal government spending. Since AMERIGROUP’s revenue is proportional to the number of Medicaid members it can enroll in its network, more Medicaid members nationwide could bring the company additional business.
The 78 million members of the baby-boomer generation have just begun to enter their 60s, an age group that is uniquely susceptible to long-term medical conditions and disabilities. These aging baby-boomers are rapidly enrolling in Medicaid programs and using Medicaid funds to pay for expensive and long-term medical treatment. Elderly and disabled people account for only 25% of Medicaid membership, but 70% of program spending. Moreover, the Medicaid enrollment rate of the aged/disabled is three times higher than the enrollment rate of the general population. But we are only seeing the tip of the iceberg: 20% of Americans will be 65+ by 2040, compared to 12.5% in 2000.  As the baby-boomer generation becomes older in the upcoming decades, Medicaid enrollment and spending can be expected to increase dramatically.