Key insights
- Centene's stock price has declined due to concerns about membership losses from aggressive repricing and potential adverse selection. The company faces challenges from Medicaid cuts, expiration of enhanced premium tax credits, and elevated healthcare benefit ratios. CEO's remarks at a conference exacerbated investor worries, leading to a significant drop in share price. This news has a slightly negative impact on the US market, particularly for healthcare insurers.
Centene has had signification reduction in share price (from around $42-44) since their last earnings. It started with a 15-20% drop due to their CEO Sarah London's remarks at the March 10th Barclays Health Conference (more on that at the end).
Centene's share price had/has been demolished last year (reached a low of around $25) due to 3 major factors:
- OBBBA's medicaid cuts which start in FY2027. Medicaid is around 50% of revenue. 2. Expiration of the ePTCs (the enhanced premium tax credits aka Obamacare enhanced (the thing the shutdown was over)). 3. Elevated HBR/MLR ratio. I am still unsure what the primary cause for this was/is.
-Some say it is due to fears over the cuts so people starting using up healthcare services more.
- Some say it is this surge in utilization coupled with higher acuity (at least in Medicaid) and maybe specialty pharma increased costs.
- Whatever the reason is, HBR ratio is still elevated for basically all major US healthcare insurers and this has plagued the industry for quite som time.
Due to the above factors, some people like me banked on Centene to recover at least some earnings (especially for ePTCS - ObamaCare) as their large increases in premiums would offset some projected membership loss enough to boost earnings substantially (maybe not recover to historical trends but at least enough to make it attractive). Centene's share price went from a low of around $25 in August to a high of around $47 in January as a result of this line of thought.
Now however, Centene is back to $32 due to fears that the loss in membership due to aggressive repricing was much, much higher than expected. Not only would this shrink potential revenue, it could also boost acuity due to adverse selection (insurance pool gets sicker). Here is the relevant Q&A portion (Sarah's response which caused the stock to tank is in the first paragraph (I bolded it)):
Andrew Mok Barclays Bank PLC, Research Division
Great. A lot to unpack there. But let's start with the ACA. Based on your membership comments and guidance, I think you're expecting year-end ACA to be down close to 40%, whereas I think previously, you were expecting industry attrition in the high teens to mid-30s. So how should we think about that difference? Is industry attrition tracking worse than initially expected? Or are you losing modest market share? Or is it some combination of the 2?
Sarah London CEO & Director
Sure. So our view was that the market would shrink somewhere between the high teens and the mid-30s. But we were pretty consistent in a view that we would be at the higher end of that and possibly higher than the top end of that, partly because of our FPL mix and partly because of the pricing actions that we took coming into the year and our focus on margin over membership.
So the membership trajectory is actually tracking, as we just talked about, very nicely in line with our expectations, including that big step down from January to February. So we feel good about that view of, again, roughly 3.5 million members at the end of Q1 and then modest attrition throughout the rest of the year, which is really just a function of a return to more normal seasonality in that product line.
So what do you guys think?
Edit: Forgot to add that the Democrats shutdown the government as a means of negotiating with the GOP to extend the ePTCs but that failed