WellCare posted a bigger year-over-year profit in the third quarter, but the health insurer's stock dipped sharply in early trading Wednesday after projecting its new Iowa Medicaid contract would be significantly unprofitable in the early stages.
The Tampa, Fla.-based company also faces political uncertainty in Kentucky, where voters elected a new Republican governor.
WellCare was one of four private insurers that won Iowa's three-year Medicaid privatization contracts. Starting Jan. 1, the companies will start receiving capitated premiums and cover the care for the state's 600,000 low-income Medicaid enrollees. Iowa's decision to outsource Medicaid to private companies has drawn criticism from state residents as well as Democratic presidential candidate Hillary Clinton. The Iowa caucuses kick off the presidential electoral process in February.
But at least in the short term, WellCare executives expect to lose money on the deal. The insurer said Wednesday it intends to book a premium deficiency reserve of up to $95 million in the next quarter due to the Iowa contract. Premium deficiency reserves essentially predict that medical claims will surpass the premiums collected. Accounting rules require insurance companies to recognize premium deficiency reserves when it's likely there will be losses.
WellCare also anticipates to spend from $6 million to $9 million on startup costs related to the Iowa contract. The stock went into a free fall during morning trading and was down almost 14% at one point. But WellCare still thinks the business eventually will turn a profit.
“We expect our Iowa Medicaid business to be a meaningful contributor to our results in the long term after investments that we are making to ramp up operations and transition members,” WellCare CEO Ken Burdick said in a news release.
Contract bidders knew Iowa's Medicaid payment rates ahead of time, and they also knew that the state could reset rates after the first 18 months based on the insurers' claims history. Larger plans such as Anthem and UnitedHealth Group are able to absorb initial Medicaid losses much more easily than their relatively smaller competitors due to their size, experts say. Yet other companies are willing to take the financial risk because more states are moving toward Medicaid managed care.
“The bear view is that managed-care competition for new Medicaid business has become so intense that the (managed-care organizations) are willing to take three-year Medicaid contracts at a loss,” Goldman Sachs analyst Matthew Borsch said in an investor note.
Another question mark for WellCare involves Kentucky. Voters in the Bluegrass State just elected Republican and Tea Party darling Matt Bevin to the governor's mansion. Bevin has been a vocal opponent of the Affordable Care Act and has stated he would be willing to reverse or modify the state's Medicaid expansion.
WellCare covered 436,000 Kentucky Medicaid beneficiaries as of Sept. 30, a 7% increase from the same time last year. Payments from Kentucky's Medicaid program also represented 19% of WellCare's $10.2 billion of premium revenue in the first nine months of this year. The company has said most of the Kentucky membership surge has stemmed from “increased participation in the ACA Medicaid expansion program.”
If Bevin decides to roll back the state's Medicaid program, it could adversely affect WellCare and other managed-care insurers in the state. The other managed-care companies that operate Medicaid plans in Kentucky are Aetna, Anthem, Humana and Passport Health Plan.
WellCare's third-quarter net profit rose from $19.3 million last year to $36.4 million this year, continuing its slow but profitable turnaround. Medical claims came in much lower, especially for the company's Medicare Part D prescription drug plans.