In the unforgiving theater of Wall Street, Centene Corporation just gave us all a front-row seat to what happens when healthcare math goes sideways. The managed care giant's stock crashed—and I mean crashed—by more than 40% yesterday after executives admitted they'd badly miscalculated medical costs. We're talking about $14 billion in market value gone before most people finished their morning coffee.
Good lord.
The culprit behind this financial bloodbath? Turns out that when people who've been kept on Medicaid during the pandemic finally get kicked off and then find their way back on again, they tend to need—surprise!—actual healthcare. And lots of it.
Let me back up a bit.
During the pandemic, there was this thing called "continuous enrollment" that basically told states they couldn't boot people from Medicaid, even if their eligibility changed. For Centene, which makes about two-thirds of its money from Medicaid, this was basically a government-guaranteed customer base. Pretty sweet deal if you can get it.
That all ended in April 2023. Since then, states have been busy "redetermining" who belongs on their Medicaid rolls—a process about as gentle and precise as performing eye surgery with a butter knife.
Here's where it gets truly fascinating (if you're into healthcare economics, which, admittedly, I've been covering since the early ACA days): The people dropping out of Medicaid aren't a random sample. No, no. The healthier, cheaper-to-insure folks are the ones disappearing, while those with expensive, complex conditions are fighting like hell to stay covered.
Centene's CEO Sarah London—who's probably had better days at the office—acknowledged this on yesterday's earnings call, explaining that "members who have a greater need for care are more likely to respond to outreach and complete the redetermination process."
No kidding.
I've seen this movie before. Back when the Affordable Care Act first launched, insurers drastically underestimated just how much pent-up medical demand existed among people who'd been uninsured. History doesn't exactly repeat itself, but it sure does hum a familiar tune.
The quarterly numbers tell the grim tale: adjusted earnings of $2.02 per share (analysts expected $2.33) and revenue of $39.84 billion (versus expectations of $40.17 billion). In any rational universe, missing revenue projections by less than 1% wouldn't trigger financial Armageddon. But we don't live in a rational universe—we live in the stock market.
Oh, and they also mentioned "increased utilization in certain specialized pharmaceutical categories." Translation for normal humans: Really expensive drugs are getting even more expensive, and more people need them. Shocking, I know.
What's particularly interesting about this whole debacle (if you can call a $14 billion loss "interesting" rather than "catastrophic") is how it exposes the fundamental contradiction at the heart of the managed care business. These companies essentially make money by predicting the future—specifically, future healthcare costs—then charging more than those costs while implementing programs to keep actual spending below their predictions.
When reality throws a wrench in those predictions... well, you get days like yesterday.
For investors still holding Centene stock—my condolences, by the way—the million-dollar question is whether this is a one-time adjustment or the beginning of a longer-term problem. The company cut its full-year earnings guidance from "at least $6.70" per share to "at least $6.00"—roughly a 10% reduction that somehow triggered a 40% stock plunge.
Either Wall Street knows something we don't, or this is one of the more dramatic overreactions I've witnessed in my years covering healthcare finance.
My take? It's probably somewhere in between. The Medicaid redetermination mess is temporary, but pharmaceutical costs? Those aren't going anywhere but up.
At current prices, Centene might look tempting to bargain hunters. But remember what Warren Buffett says about the difference between price and value. Figuring out which has changed more dramatically for Centene will separate the healthcare investing pros from the dabblers.
And let's be honest—in healthcare, just like in medicine, recovery is rarely as quick as the injury. Just ask anyone who's ever blown out a knee.
Or, in Centene's case, blown up a balance sheet.
