Centene Corp. is carving out a niche as a health insurer focused on the Affordable Care Act markets as most other major managed care companies flee them.
While Anthem Inc. has been dropping out of states, Centene has been entering markets to shore up coverage in counties that would have had no insurer offering plans. Centene has been able to eke out narrow profits in markets where its peers suffered losses large enough to push them out entirely.
Leerink Partners equity analyst Ana Gupte said in an interview that the company is making a"big bet" that critical cost-sharing reduction payments, which are made to insurers to help offset the cost of providing health insurance to high-risk or low-income patients, will continue to be dispersed to insurers.
Cost-sharing reductions have been the center of debate in Washington as President Donald Trump has opted to decide whether to make the payments month-to-month. In addition to the uncertainty of whether the White House will issue the payments, Capitol Hill has fractured over the payments, with state attorneys general filing lawsuits to protect the payments. State governors have also begun pushing Congress to completely fund them.
Yet amid the uncertainty, Centene has maintained profitability in the markets where it participates.
"It is a big bet, and it's a meaningful percentage of their earnings" she said, referring to the company's exchange health plans. "They seem to have been decently profitable at least in 2017 — they've been running in the mid-single digits in operating margins."
In a research report released Aug. 29, Moody's wrote that the credit impact from adverse ACA developments on its rated health insurance companies has been "muted" as it reflects in part the "small size of the individual market relative to the overall size and diversity of the universe of its rated issuers."
But Centene, the agency wrote, has leveraged its expertise in Medicaid to run an efficient ACA business. The company has been "profitable on the exchanges, starting small and learning while it grew," Moody's wrote.
In Nevada, Insurance Commissioner Barbara Richardson secured Centene to offer plans in 19 counties after Anthem withdrew from all but three in June. Had Centene not stepped in, 14 counties in the Silver State would have had no insurer offering plans on the state's exchange for 2018.
While Richardson declined to reveal negotiations between the state and the company, she said in an interview that her office did arrange for Centene to tap into Hometown Health Plan Inc.'s provider network. Originally, Centene had only entered the state's Medicaid market and was licensed to operate in the state.
"They attribute [the lower margins] to their Medicaid network, which is lower-cost, and they've been good at the risk-adjustment process. They seem to be doing well, although Molina Healthcare Inc. has had issues," Gupte said.
The ACA's risk adjustment program guarantees that insurers that enroll higher-risk consumers receive compensation from the Centers for Medicare and Medicaid Services to help pay for extra services. The agency transfers money from insurers who enroll more low-risk consumers and distributes them to insurers who enroll higher-risk consumers as a way to encourage competition between insurers to offer efficient plans.
In October 2016, Molina urged CMS to revise its risk transfer methodology so low-cost and low-premium insurers would not be penalized. The company expressed that a key weakness of the methodology is that it redistributes dollars among health plans based on total premiums, not health risk. The risk adjustment program contributed to the collapse of several co-ops and small independent insurers in 2015.
By designing its ACA products in the same way it has its Medicaid network, Centene has stayed profitable despite uncertainty from the federal government, Jefferies equity analyst David Windley said in an interview.
The products have been dubbed "Medicaid prime" for short, Windley said.
Compared with typical ACA exchange plans, "the cost structure under that product is lower, the type of member that it attracts is likely different and more Medicaid-like than commercial and that approach, so far, has produced positive profit margins," Windley said.
Windley pointed out that Centene has been able to leverage its position as the only insurer in some markets like Arizona and Nevada, where regulators were desperate to gain the company's coverage in those states.
For the future, it is likely Centene will continue to enter ACA markets as it attempts to gain more market share, Gupte said.
"They've continued to expand their geographic presence," Gupte said. "I think it's possible, as other players are retrenching, they can fill in the gap."