Obamacare: Rough Rollout, Assured Profits

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Since the new health insurance exchanges mandated by the Patient Protection and Affordable Care Act (PPACA) went live on October 1, nearly 15 million people have visited the related web sites, exposing design flaws and frustrating many consumers with error messages and slow loading times. An estimated 7 million people visited the sites over the first weekend they were live.

A major part of the problem is the requirement that each of the exchange web sites must reconcile millions of pieces of information pulled from databases from the US Department of the Treasury, Centers for Medicare and Medicaid Services and the Department of Health and Human Services. The web sites also use code and databases built by 55 contractors, virtually guaranteeing compatibility issues.

While the Obama administration has yet to release the numbers, it’s estimated that nearly half a million people have successfully applied for health coverage through the exchanges so far, despite the problems. Still, because of these technical glitches, it’s an open question as to whether the program with hit the 7 million sign-ups the Congressional Budget Office expected during the first six-month sign-up period.

Implementing the exchanges has already cost the government more than $400 million and the repairs will likely cost tens of millions more. Despite the high cost, contractors are skeptical that they will be able to hit the administration’s November 1 target date for having the glitches corrected and are worried that they might not have the sites operating properly until after the December 15 enrollment deadline for January coverage.

In the end, will these hiccups matter? Not really. Remember, Medicare experienced similar problems, when it was implemented in the mid-1960s.

Despite ! the plethora of implementation issues, a number of health care industry players will benefit from the uptick in patient volume the Obamacare exchanges will ultimately create.

Managed care organization WellPoint (NYSE: WLP) will be one of the biggest gainers. It currently operates in 20 states under Blue Cross/Blue Shield, giving it unparalleled name recognition across the country. It also already serves about 35 million consumers with more than 10,000 participating primary care doctors across the country.

WellPoint currently plans to participate in exchange plans in 14 states, all of which it already operates in and holds average market share of 32 percent. While its name recognition will certainly work in its favor, WellPoint’s plans also offer superior value given the company’s large provider network and nationwide economies of scale. It also plans to participate in the Medicaid programs in the 20 states where it currently operates and is considering how to leverage the opportunities created based on its expectation that the majority of states will participate in Medicaid expansion by next year.

WellPoint won’t report third quarter results until the middle of this week and any impact from the exchanges won’t begin showing up until the fourth quarter, but in the second quarter total revenue was up 15.5 percent. That was largely driven by a more than 50 percent increase in government membership thanks to its Amerigroup acquisition.

Express Scripts (NASDAQ: ESRX), the nation’s largest pharmacy benefit manager (PBM), will also be a major player in the larger market created by the exchanges.

Essentially a middleman negotiating drug pricing among insurance plans, drug manufacturers and pharmacies, Express Scripts became the largest PBM following its acquisition of Medco last year. In 2012, it processed more than 1.3 billion prescription claims.

Express Scripts is able to leverage its size to negotiate some of the most favorable pricing ! schemes o! f any PBM, resulting in some of the lowest administration costs and highest profits per claim. As a result, many of the patients the managed care plans pick up will find themselves covered under Express Scripts’ pharmacy programs, boosting Express Scripts’ prescription volumes.

Express Scripts enjoys low marginal costs for each newly added patient, because of its nationwide scope and largely automated systems. That means most of the revenue realized from the higher volumes will flow to the bottom line and to investors in the form of higher earnings per share.

So despite the rocky rollout of the insurance exchanges, there’s still plenty of money to be made from their implementation. While it is tough to put a finger on just how many new enrollees will emerge, the huge interest the public has shown so far is a major plus for companies such a WellPoint and Express Scripts, which will be able to generate strong margins on any increase.

Uninsured Americans eager to get health coverage just may save Obamacare from itself.