July 23, 2019 / 10:10 AM / a month ago

Centene signals higher costs in 2019 from Obamacare business

(Reuters) - Centene Corp (CNC.N) beat second-quarter sales targets and raised its 2019 earnings forecast on Tuesday, but the health insurer warned of higher medical costs from its Obamacare business this year.

The company expects a marginally higher health benefits ratio (HBR) of between 86.6% and 87.1% in 2019, from its previous forecast of 86.5% to 87%.

HBR measures the financial performance of health insurers by comparing the amount spent on medical claims with income from premiums.

“We continue to experience a higher membership retention rate compared to prior years,” Chief Financial Officer Jeffrey Schwaneke said.

“As members stay with us longer, it increases medical costs in the HBR. I just want to emphasize that this is a slight increase and we are still well within our 5% to 10% pre-tax margin targets (for Obamacare exchange plans).”

Analysts said the medical cost trends for Centene, which is buying smaller rival WellCare Health Plans Inc (WCG.N) for $15.27 billion, were nothing to worry about.

Shares of the company fell as much as 3.4% to $50.39, before reversing course to trade up slightly on Tuesday.

“Despite Centene’s robust overall revenue, cash flow and adjusted earnings per share trends, investors have been nit-picking at this stock all year,” Stephens analyst Scott Fidel said.

“That slight increase to the HBR guidance may have surprised investors this morning.”

Centene, like its peers, has been under pressure as in the run up to the 2020 presidential election, candidates have been divided on the issue of health insurance.

Centene is banking on the WellCare deal to help reduce its exposure to Obamacare healthcare exchange, save costs and bulk up its businesses that sell government-backed health plans.

In the second quarter, Centene’s HBR worsened to 86.7% from 85.7% a year earlier. Analysts had expected 86.42%, according to IBES data from Refinitiv.

Centene, which earned $1.34 per share in the quarter excluding items, said the HBR rise was due to higher costs from its Obamacare business and its 2018 acquisition of Fidelis Care, which had a higher HBR.

Total revenue rose 29.4% to $18.36 billion, beating estimates of $18.01 billion.

Centene raised its 2019 adjusted earnings per share forecast to $4.29 to $4.49, from $4.24 to $4.44.

The health insurer also raised its 2019 sales forecast to between $73.6 billion and $74.2 billion, from $72.8 billion and $73.6 billion.

Reporting by Manojna Maddipatla and Tamara Mathias in Bengaluru; Editing by James Emmanuel and Shinjini Ganguli

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