Massive losses surrounding Health Net's individual exchange plans overshadowed the second quarter at Centene Corp., which almost doubled profit and revenue. As a result, Centene will exit a “considerable amount” of exchange business in Arizona next year.
Investors sold off shares of Centene Tuesday because of the Health Net worries, pushing the company's stock price down as much as 15% during morning trading. Centene closed the day at $68.87, an 8.5% drop.
Centene reported a $169 million profit on $10.9 billion of revenue in the second quarter this year, up significantly from an $88 million profit on $5.5 billion of revenue in same period last year. Centene also raised its earnings projections for the rest of the year. But the integration of Health Net, which Centene acquired earlier this year, has revealed structural problems.
Health Net had a larger footprint in the Affordable Care Act's exchanges than Centene, a health insurer that mostly contracts with states to provide Medicaid coverage to low-income people. However, Centene has profited from its ACA plans while others have drowned in losses.
Yet, in the second quarter, Centene was forced to report a $300 million premium deficiency reserve, an accounting measure that factors in a probable future loss. Like UnitedHealth Group and several other large insurers that have reported similar premium deficiency reserves, Centene attributed the losses to high claims from the individual and small-group exchanges.
Centene's ACA exchange profits remain “at the high end of our targeted range,” but acquiring Health Net dragged the company down. Executives tried to quell the panic by saying the issues are being resolved through price hikes and benefit design changes, and the problems won't impact the company in 2017.
“We believe we have effectively addressed these concerns,” Centene CEO Michael Neidorff said on an investor call Tuesday. “They are manageable.”
Specifically, the losses were tied to “unfavorable performance” in Health Net's Arizona and California individual markets. That included a lack of risk-corridor funding and detrimental effects from the “grandmothering” of older, pre-ACA plans, which means they only had to comply with some of the ACA's standards. Health Net also has PPO plans with broader networks of hospitals and doctors, which often appeal to sicker people who are willing to pay higher premiums if it means their providers are in-network. Conversely, Centene offers more high-deductible, narrow-network plans with cheaper premiums, plans that attract price-sensitive consumers.
Neidorff and Jeffrey Schwaneke, Centene's new chief financial officer, also said “disputed” substance abuse center claims and Health Net's low-performing Medicare contracts factored into the anticipated losses.
Centene has about 618,000 ACA exchange members, as of June 30, and executives estimate that will whittled down to about 550,000 by year-end. Starting in 2017, Centene will stop offering health plans in a “considerable amount” of Arizona, although no details were given.
The St. Louis-based insurer ended the second quarter with 11.4 million members, more than 1 million of whom received coverage due to the ACA's Medicaid expansion. Outside of the exchanges, Centene continues to win Medicaid managed-care contracts, as well as contracts tied to prison healthcare and military health coverage.
