Shares of Molina Healthcare, Long Beach, Calif., and its competitors took a beating after the fast-growing Medicaid HMO warned of a second-quarter loss and slashed its 2005 earnings forecast 70%. Earlier in the week, another leading Medicaid HMO, Amerigroup Corp., Virginia Beach, Va., also cut its second-quarter and full-year projections. Health plans that cover Medicaid beneficiaries have seen their profits and stock prices soar in recent years as more states have turned to private managed-care companies to contain rising Medicaid costs. Molina said it expects to earn 73 cents per share to 80 cents per share in 2005, down from a prior forecast of $2.40 to $2.45 -- a range it reaffirmed as recently as May. Net income last year was $2.04 per share. The company also said it would report a second-quarter per-share loss of 15 to 20 cents, compared with a profit of 46 cents per share in the year-ago quarter.
Molina blamed rising medical costs, including unexpected hospitalizations in certain markets and a late flu season in March and April, which sent more patients than the company anticipated to emergency rooms. Amerigroup cited similar troubles when it cut its 2005 earnings projections to between $1.73 per share and $1.78 per share, from a prior outlook of $1.90 to $1.98. "These shortfalls are largely caused by the weak provider contracting spurred on by the companies' zeal to win these Medicaid contracts," Prudential analyst David Shove wrote in a research note. "In that zeal, the contractors tend to develop very expansive networks by agreeing to pay providers generously." -- by Laura B. Benko