Story Stocks^®

Centene (CNC -39%) is under heavy pressure today after announcing last night it is withdrawing its prior FY25 EPS guidance, including the underlying guidance elements. Its decision was based on its recent review of 2025 industry Health Insurance Marketplace (Marketplace) data from Wakely, an independent actuarial firm. The data was relevant to Centene since it covered 22 of Centene's 29 Marketplace states, and it represented 72% of the company's Marketplace membership.

• Basically, the data showed that the overall market growth in the 22 states is lower than expected. In addition, the implied aggregate market morbidity in those states is significantly higher than, and materially inconsistent with, the company's assumptions for risk adjustment revenue transfer. Centene's analysis of the 22 states results in a reduction to its previous full year net risk adjustment revenue transfer expectation by ~$1.8 bln which corresponds to an adjusted EPS impact of ~$2.75.
• That is quite a significant change from prior expectations and that results in a huge impact on the financial performance of this managed care organization, which primarily focuses on Medicaid and Obamacare insurance marketplaces.
• The company says its Medicaid business has already experienced a step-up in the medical cost trend in behavioral health, home health and high-cost drugs. And this was especially the case in specific geographies, such as New York and Florida. Accordingly, CNC expects Q2 Medicaid Health Benefits Ratio (HBR) to be higher than Q1.The silver lining for Centene was that the final 2024 risk adjustment results released by Centers for Medicare and Medicaid Services (CMS) yesterday were in line with expectations.

It has been a rough few months for healthcare stocks. Of course, there is the slowing of growth in Medicaid funding as part of the tax bill working its way through Congress. But it's not just that. They have been dealing with higher costs and President Trump talking about drug price reductions. Also, this guidance follows the announcement in mid-May from United Healthcare (UNH) that it suspended guidance and its CEO stepped down at the same time.

These recent developments make us nervous for healthcare stocks in general as we head into earnings season in a few weeks. Not only with the tax bill likely be wrapped up by then and the corresponding spending reductions will be final, but these companies are dealing with higher costs and sluggish enrollment. And what makes the Centene news more concerning is that it just outright withdrew guidance, which scares investors even more than a reduction. This tells us that CNC itself does not really know what to expect for the balance of the year.