Medicaid Contractor Centene Was Top Financial Performer In St. Louis

St. Louis — New business opportunities to serve the poor, elderly and sick in an expanding number of states, as well as new ventures outside its core business, drove Centene Corp. last year to record financial heights.

The Clayton, Mo.-based manager of health care for the uninsured and downtrodden broadened its operations last year in Texas, Mississippi, Louisiana and Florida and began serving Medicaid beneficiaries in California, Kansas and New Hampshire.

Centene’s Medicaid Business

Centene took steps to further diversify by buying a specialty pharmacy company, participating in new health insurance marketplaces, and providing medical care in prisons.

The company also waded into long-term care in the burgeoning “in-home health” services market for the chronically ill and even purchased a stake in a Spanish health management group.

In 2013, Centene was the local publicly held company with the best fiscal performance due to its size, return on shareholder equity, revenue growth and profit growth, a Post-Dispatch analysis concluded.

Centene soared through 2013 by reporting $10.5 billion in revenue, a 37 percent increase over the previous year. Its profits totaled $161.2 million, compared to $1.9 million in 2012 when it reported a large loss related to its discontinued Kentucky business.

Company executives say they are likely to approach $15 billion in revenue in 2014.

“We believe we’re a St. Louis success story,” said Bill Scheffel, Centene’s chief financial officer. “Managed care is a growth industry. … Medicaid is our sweet spot.

“Our compounded growth rate (of revenue) for the last three years is 40 percent,” he said. “We don’t see in the near term any slowdown in growth opportunities.”

Centene employs 9,500 people nationwide, including about 2,000 in the St. Louis area. Its headquarters in downtown Clayton has an on-site medical clinic for workers and a cafe that offers discounts on healthy foods.

The Medicaid contractor’s strong suit is claims processing and its ability to use computer modeling systems to predict with accuracy its members’ health costs.

Still, some patient advocates worry that, to reap greater profits, Centene may clamp down on the quality of care received by its members.

Centene executives say they are committed to improving the health of Medicaid populations.

“We provide quality health care, we save the states money, and we give (the states) budget predictability,” Scheffel said.

Medicaid Expertise

Centene traces its roots to a Medicaid managed care business it started in Wisconsin in 1984.

Since going public in 2001, it has grown into a Fortune 500 powerhouse (ranked 303 last year) that manages state and federal health programs for an “at risk” membership of 2.7 million uninsured and underinsured people in 20 states including Missouri.

“Overall, Centene is one of the most effective players in what is a rapidly growing part of managed care: private providers’ solutions to state health care challenges,” said Tom Carroll, an analyst for St. Louis-based Stifel Nicolaus & Co. Inc. He has given Centene stock a “hold” rating.

Medicaid spending, he added, is one of the largest budget items and challenges for any state.

Centene has “done a very good job of growing the company over the past decade by expanding not only into new states but more recently into new populations within those states,” Carroll said.

Traditionally, Medicaid and CHIP, the Children’s Health Insurance Program, assisted single mothers and children. More recently, Centene has worked with states to broaden the focus to include older, sicker and chronically ill patients on Medicaid.

For example, Centene won a large portion of Florida’s revised Medicaid program, which now includes the aged, blind and disabled. It also provides long-term care in the Sunshine State.

Its new contracts in Michigan, Ohio and South Carolina include health coverage for “dual eligibles” — low-income seniors and people with disabilities who are enrolled in both Medicaid and Medicare.

Centene’s contracts in states such as Illinois have expanded to include care coordination, optometry, behavioral health and pharmacy benefit management services.

Beginning in 2013, Centurion — Centene’s joint venture subsidiary with MHM Services Inc. — has won contracts to provide mental health and preventive health services to 41,000 inmates in prisons in Massachusetts, Tennessee and Minnesota. These new efforts give Centene experience in operating point-of-care clinics.

Centene has Medicaid contracts in 14 states including Louisiana, Texas and Missouri.

“Centene’s contract pipeline through 2014-15 remains robust,” Sarah James, an analyst at Wedbush Securities in Los Angeles, wrote in a recent report.

Wedbush has given Centene stock an “outperform” rating, based on its view that it will benefit significantly from Medicaid expansion.

Three of the states where Centene serves Medicaid populations — California, Massachusetts and Washington — are expanding their programs. As more states decide to expand their programs, Centene is expected to benefit from enrollment increases.

Centene has captured 14.6 percent of the managed care market for at-risk residents in Missouri, where the Legislature has refused to expand the Medicaid program. Centene’s subsidiary, Home State Health Plan, provides health services in 54 Missouri counties to 59,200 uninsured people.

The two other managed care providers for Missouri Medicaid are Tampa-based WellCare Health Plans Inc. and Healthcare USA, a Coventry unit owned by Aetna Inc.

Wedbush’s James said new business is likely to account for 21 percent of Centene revenue in 2014.

Centene is participating in health insurance exchanges in nine states and plans to expand its offerings in these states in 2015. About 80 percent of its enrollees are low-income residents who are eligible for federal subsidies, but not for Medicaid.

But the company’s expected enrollment of about 70,000 people this year on the health exchanges is expected to have only a minimal impact on its financial performance.

“While enrollment is small in the exchanges, they showed an ability to develop and deploy a new health insurance product — targeting folks who don’t qualify for Medicaid but are living close to the edge,” Stifel’s Carroll said.

Some of Centene’s success can be chalked up to vertical integration.

“Centene has been very acquisitive over the years,” Carroll said. “It’s acquired the right tools to effectively serve a Medicaid population.”

For example, Centene’s behavioral health subsidiary, Cenpatico, provides mental health services to 156,000 members in Arizona and also provides services in other states. The Medicaid population has high rates of mental illness.

In 2013, Centene acquired AcariaHealth, an Orlando, Fla.-based specialty pharmacy company.

AcariaHealth is one of the largest distributors of Solvaldi, a new and highly expensive Hepatitis C drug that has spiked medical costs for other Medicaid providers. Centene’s new ownership of AcariaHealth, however, has offset the expense of Solvaldi.

“That’s a great example of how Centene is managing the population well and dealing with a new, high-cost drug,” Carroll said. “It looks brilliant on Centene’s part.”

(St. Louis County-based Express Scripts Holding Co., a pharmacy benefit manager, has reacted to Solvaldi’s high costs by forming a coalition to boycott the drug once a competitor reaches the market.)

In January, Centene acquired a majority stake in U.S. Medical Management, which provides in-home health services to high acuity populations. In April, Centene agreed to purchase a noncontrolling interest in Ribera Salud S.A., a Spanish health management group that is widely regarded for its public-private health care partnership model.

Scheffel said the transaction represents Centene’s “initial foray into the international” sphere in which the company will gain valuable experience.

Keith Williamson, Centene’s general counsel, also attributed Centene’s continued success to a corporate culture that embraces “flexibility, innovation, entrepreneurship and high standards” as well as civic engagement and volunteerism.

Risk Factors

According to the federal Centers for Medicare & Medicaid Services, the total Medicaid and CHIP market was about $408 billion in 2011; the market is estimated to rise to $839 billion by 2022.

Indianapolis-based WellPoint Inc. has the largest number of Medicaid members, followed by Minnesota-based UnitedHealthcare. Centene, which is No. 3, faces stiff competition from Long Beach, Calif.-based Molina Healthcare Inc. and WellCare.

Despite its success, Centene depends heavily on state governments and its ability to retain key contracts for its revenue.

Its managed care subsidiaries in Texas, for instance, represent 37 percent of Centene’s revenue from its continuing operations in 2013. Centene serves one quarter of the Texas market for managed care of at-risk populations. Its members there total about 935,100 people.

As a government contractor and “price taker,” Centene has a high exposure to changes in state budgets and rate setting. The company’s risks also include unexpected changes in medical costs or the utilization of these services.

It can also be dicey entering new states. Centene ran into trouble in Kentucky, where — according to Centene executives — rates were set based on health data that underestimated true costs.

After negotiations to raise its rates faltered, Centene last year terminated the contract. Litigation between Centene and the Commonwealth of Kentucky continues over whether the company had the right to end the contract a year before it was set to expire.

A loss for Centene could cost the company as much as $46 million, Scheffel said.

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