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Sahil Vora

AGP AT A GLANCE

P/E ► 7.68 LOW EV/EBITDA ► 6.34 AVG ROA ► 8.3% AVG ROE ► 16.7% AVG Debt to Equity ► 1.10 AVG Current Ratio ► 0   Interest Coverage Ratio ► 14.8 AVG

 

 

 

 

 

 

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. ^[1]

AMERIGROUP’s membership pool, the source of 98-99% of the company’s revenue,^[2] grows and shrinks with the number of Medicaid enrollees nationwide. Medicaid enrollment will 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.^[3] 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. Two-thirds of Medicaid directors anticipate at least a 50% chance of facing a budget shortfall in FY 2009.^[4] 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.

Business Overview

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, 83% of the company's subscribers are enrolled on Medicaid.^[5] In exchange for a monthly subscription premium, AMERIGROUP connects its 1.7 million members^[6] to a healthcare provider network of approximately 82,000 physicians and 640 hospitals^[7] across 11 states.^[6] 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. ^[1]

Business and Financial Metrics

Revenue and Net Income^[8]

AMERIGROUP’s revenue and net income have 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.^[2]

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.

Trends and Forces

Worsening economic conditions will lead to higher Medicaid enrollment, expanding the company’s potential membership pool.

Medicaid enrollment grew 2.1% in FY 2008, 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.^[4] 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.^[3] 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.

Medicaid eligibility and provider payments have been expanded provisionally for FY 2009, but states will implement mid-year cutbacks if Medicaid demands outstrip available funds.

Surveys of Medicaid programs across the U.S. indicate that the vast majority of states have expanded Medicaid coverage for FY 2008 and 2009 by establishing higher payments for providers, looser eligibility requirements, and more benefits for patients. ^[4] However, as the U.S. economy settles into a long-term recession, Medicaid membership will grow while state tax revenue drops. ^[4] Even a 1% increase in national unemployment would drive tax revenues down by 3-4%.^[3] As a consequence, two-thirds of Medicaid directors anticipate at least a 50% chance of facing a budget shortfall in FY 2009.^[4] An insufficient budget allocation for Medicaid, at the state or federal level, would force Medicaid programs to tighten eligibility standards, cut down Medicaid enrollment, or cut back on payments to healthcare providers and HMOs. In the last economic downturn, from 2001 to 2004, states went as far as to freeze payments to providers to cut back on Medicaid spending.^[13] However, AMERIGROUP's business will be somewhat insulated from state budget shortfalls, since Texas, the company's largest membership source, expects an $11 billion budget surplus.^[14]

The aging of the baby-boomer generation increases nationwide Medicaid enrollment, especially for long-term care.

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.^[15] 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.^[16] Moreover, the Medicaid enrollment rate of the aged/disabled is three times higher than the enrollment rate of the general population.^[17] But we are only seeing the tip of the iceberg: 20% of Americans will be 65+ by 2040, compared to 12.5% in 2000. ^[15] As the baby-boomer generation becomes older in the upcoming decades, Medicaid enrollment and spending can be expected to increase dramatically.

Competition

References

1. ↑ ^{1.0 1.1} AGP 2007 10-K page 3
2. ↑ ^{2.0 2.1} AGP 2007 10-K page 51
3. ↑ ^{3.0 3.1 3.2} Kaiser Commission on Medicaid and the Uninsured, “Unemployment’s Impact on Uninsured and Medicaid, 2008
4. ↑ ^{4.0 4.1 4.2 4.3 4.4} Kaiser Commission on Medicaid and the Uninsured, “States See Rising Enrollment in Medicaid as Economy Falters”, 9/29/2008
5. ↑ [http://www.sec.gov/Archives/edgar/data/1064863/000095013308003445/w71300e10vq.htm AGP Q3 10-Q page 19
6. ↑ ^{6.0 6.1} AGP 2008 10-Q Q3 page 18
7. ↑ AGP 2007 10-K page 13
8. ↑ SEC 10-K 2007 page 41
9. ↑ [ http://www.sec.gov/Archives/edgar/data/1064863/000095013308000739/w49963e10vk.htm AGP 2007 10-K page 51]
10. ↑ [ http://www.sec.gov/Archives/edgar/data/1064863/000095013308003445/w71300e10vq.htm AGP 2008 Q3 10-Q page 15, 17]
11. ↑ [ http://www.sec.gov/Archives/edgar/data/1064863/000095013308000739/w49963e10vk.htm AGP 2007 10-K page 16]
12. ↑ [ http://www.sec.gov/Archives/edgar/data/1064863/000095013308003445/w71300e10vq.htm AGP 2008 Q3 10-Q page 18]
13. ↑ Kaiser Commission on Medicaid and the Uninsured, “Headed for a Crunch,” 9/2008 page 8
14. ↑ AGP 2008 Q3 Earnings Call 10/23/2008
15. ↑ ^{15.0 15.1} Economist 10/30/2008
16. ↑ Kaiser Commission on Medicaid and the Uninsured, “Headed for a Crunch,” 9/2008 page 12
17. ↑ Kaiser Commission on Medicaid and the Uninsured, “Why did Medicaid Spending Decline in 2006?”, 10/2007 page 7-8