Shares of Centene Corp. soared Wednesday after the health insurer said it will end a contract to administer Medicaid coverage in Kentucky that had hampered its performance.
THE SPARK: The St. Louis company said a subsidiary that runs the coverage, Kentucky Spirit Health Plan, was unable to resolve differences with the state's Cabinet for Health and Family Services, and it would end the contract effective July 5. Centene said Kentucky Spirit also filed a "formal dispute" with the cabinet, seeking damages incurred under the contract.
A Centene official said in a brief statement that they "do not believe there is a viable path to a sustainable managed care program in Kentucky." The statement did not detail the damages or concerns over the program in Kentucky.
Centene expects to take a hit of between $60 million and $70 million in the third quarter due to its Kentucky operations. The company will release results from the quarter on Tuesday.
THE BIG PICTURE: Medicaid is the state and federally funded program that provides health coverage to the needy and disabled people. States hire private insurers to administer the coverage.
Centene is one of three private insurers that administer the coverage in Kentucky, and it started enrolling patients late last year.
In June, Centene slashed its full-year earnings outlook, thanks in part to an increase in costs in Kentucky. The insurer said retroactive assignment of members in the state was affecting its performance.
Centene, which also had problems with its Medicaid coverage in Texas, then reported a $35 million second-quarter loss in July.
Uninsured patients are retroactively assigned to a Medicaid coverage provider after they go to a hospital to seek medical care. The insurer then becomes responsible for all medical services the patient receives, and this population can hurt an insurer because it creates more in claims than the insurer receives in premiums.
THE ANALYSIS: Centene's decision could push its talks with state regulators "in a more constructive direction and lead to structural changes to the program that will help Centene become profitable over the long term," Goldman Sachs analysts Matthew Borsch and Sam Weiss said in a note to clients.
BMO Capital analyst Dave Shove said in a separate note Centene's decision could be a ploy to gain leverage in negotiations with Kentucky.
"There are several ways that things can unfold in Kentucky for Centene, and most of the potential outcomes are better than what we have seen in the region, year-to-date," he wrote, noting that the exit will likely raise the insurer's earnings next year. He kept a "Market Perform" rating and $38 price target on the stock.
SHARE ACTION: Up nearly 11 percent, or $3.79, to $38.76 in afternoon trading while broader trading indexes were nearly flat. The stock has traded between $24.26 and $50.98 in the past 52 weeks, peaking in April.