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Centene, Molina shrug off Medicaid concerns as Q4 revenues rise

Several U.S. managed care stocks saw modest rises following earnings calls this week as fourth-quarter 2022 revenue growth appeared to offset concerns about a forthcoming review of Medicaid eligibility.

Following years of COVID-19-related delays, U.S. states are expected to restart the annual Medicaid redetermination process in April, potentially causing millions of low-income individuals to lose access to government-funded healthcare.

As a result, the managed care insurers who administer these Medicaid plans stand to lose millions of customers who may opt not to purchase commercial coverage.

Centene Corp. announced full-year revenue growth of 15% to $144.55 billion in 2022 on a Tuesday earnings call where CFO Andrew Asher discussed the likely impact of redetermination on the insurer's membership.

"By April 1, we expect to have grown by 3.4 million Medicaid members since the onset of the pandemic, excluding new markets, and we expect to lose approximately 2.2 million of those members in the redetermination process over the next 1.5 years," Asher said. "In other words, about 65% of that growth."

The road ahead

Centene will be juggling a number of different headwinds and tailwinds throughout both 2023 and 2024, several of which were addressed during the earnings call, Stephens analyst Scott Fidel wrote in a research note.

"[Centene] did acknowledge that the 2024 outlook for its Medicare business will be challenging due to both its lower [Star] ratings and the weak proposed 2024 MA rates, which could result in this business performing at a negative margin next year, before also setting up for an embedded EPS and Medicare margin expansion opportunity in 2025 and beyond," Fidel said.

Fidel ranked Centene's stock as "overweight" and noted that the impact from Medicaid redeterminations represents a key swing factor. The company also reported a decline in full-year profit this week, which fell from $1.35 billion in 2021 to $1.20 billion in 2022.

Fellow managed care insurer Molina Healthcare Inc. also reported its 2022 fourth-quarter earnings this week, notching $8.22 billion in revenue, up from $7.41 billion in the fourth quarter of 2021. It also reported $31.97 billion in full-year revenue, up from $27.77 billion in 2021.

Unlike Centene, Molina CFO Mark L. Keim said the company does not expect to be significantly impacted by Medicaid redetermination due to recent acquisitions, which Molina expects will add back the number of Medicaid members lost during the process.

"We ended 2022 with about 4.7 million members and we expect to conclude 2023 with about the same," Keim said.

J.P. Morgan analyst Calvin Sternick wrote in a research note that he believes Molina's redetermination headwind will be manageable and that there is potential earnings upside from marketplace pricing and growth during the second half of 2023.

"While we think the company's pricing strategy will likely limit the number of redetermined members enrolling in a [Molina] Marketplace plan, we also believe it potentially mitigates the risk of adverse selection compared to lower-priced peer offerings," Sternick said.

By noon Friday, Centene's stock price had risen by 1.13% from the week prior to $71.81 a share, while Molina had risen 0.67% to $303.09. In contrast, the broader S&P 500 index fell 1.43% to 4,077.53 for the week as of noon Friday.

Meanwhile, the S&P 500 U.S. Insurance index gained 1.44%, rising to 606.68.

Brookfield buys Argo; Lincoln falls

Other notable activity in the insurance space this weekend included Brookfield Reinsurance Ltd. agreeing to acquire Bermuda-based Argo Group International Holdings Ltd. in an all-cash transaction worth approximately $1.1 billion.

Following the announcement, Argo's stock value rose 4.72% for the week as of noon Friday, hitting $29.31 a share, while Brookfield's stock value fell 4.14% to $36.13 a share.

Meanwhile, Life insurer Lincoln National Corp. saw a similar drop this week as CEO Ellen Cooper said the company would shift away from term life insurance products and explore possible block reinsurance transactions. Cooper said she has a "fully dedicated team" that is actively evaluating internal and external opportunities for potential block reinsurance transactions, among other things.

By noon Friday, Lincoln's stock value had fallen by 4.01% for the week and was trading at $33.86 a share.