November 06, 2019 - 5:16pm EST by
2019 2020
Price: 51.50 EPS 4.42 5.12
Shares Out. (in M): 420 P/E 11.8 10.2
Market Cap (in $M): 21,628 P/FCF 0 0
Net Debt (in $M): 826 EBIT 2,455 4,272
TEV ($): 22,454 TEV/EBIT 9.1 7.9

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Centene provides health insurance (Medicaid, Medicare, Individual) on behalf of the US government.  It is the country’s largest Medicaid managed care insurer and is on the verge of growing its Medicare presence with the pending acquisition of WellCare (WCG), expanding revenue from ~$72B to PF $100B FY19E.


The company benefits from secular growth in Medicaid and Medicare members and overall health care cost inflation driving mid/high single digit underlying revenue growth.  Currently trading ~16x earnings, below long and short-term historical 20x, valuation implies medical cost trends well above historical levels.  


An 87% cost ratio forecast results in ~$5/sh eps, or 10x implied P/E.  This implied fear generated by 2020 election uncertainty is an opportunity.


First, the different types of insurance Centene administers:

Medicaid is insurance for low income citizens, run by states with a portion of funds contributed by Federal government.

Medicare is federal insurance program for US citizens aged 65+.

Commercial plans are purchased on the exchange under the Affordable Care Act (Obamacare).  Buyers earn too much to qualify for Medicaid and are too young for Medicare. Most CNC members are low enough income to receive federal subsidies offsetting the cost of insurance.


This opportunity likely exists because of concerns around how CNC would be impacted by a Warren/Sanders presidency.



Business model

Centene 1) receives a per member per month (PMPM) premium from states (Medicaid) or Federal (Medicare) govt for each member covered under its plans in exchange for assuming their medical costs.  2) contracts with providers to set up a network of hospitals and doctors where members can receive care.  3) engages with members to improve health behaviors (preventative medicine, primary care instead of ER, prenatal care, etc) and lower medical costs.  4) targets a 3-5% pretax margin, net of medical and overhead expenses, for this service.

As the chart above shows, the company pays roughly $0.87 of every dollar on medical costs, varying by patient group.  The remainder goes to overhead, technology spend, salaries, etc.  


The chart below shows approximate reimbursement by patient type, based on actuarial risk profiles.  Low income kids and their parents require less care and are reimbursed ~$300 pmpm while seniors in Medicare require more services on average, so CNC is paid $1,000+.

Reimbursement by membership type

In addition to varied reimbursement, different patient groups have different average medical costs.  Medical cost ratio (MCR or MLR) is how many cents of each premium dollar go to care:

Source: Citigroup, 2012

Value proposition  

Centene delivers better health outcomes at lower cost to its government clients.  This is why it has steadily grown for the last 20 years and is likely to participate in any “Medicare for All” or other future reform scenario.  A few key advantages of managed care versus fee for service, especially in Medicaid.

Managed care

  • Budget certainty for state payers

  • Coordinated care/ primary physician lowers costs and improves outcomes

  • Invests in technology to prevent fraud

Fee for service

  • Unpredictable health care costs

  • Overuse of emergency room

  • Prone to billing abuse

The success of delivering better service at lower cost is why more states are shifting health care spend to managed care, and why MCOs are likely to play a role in Medicare for All scenarios.

Big picture  

Despite over a decade of strong growth, there remains a long runway as <50% of Medicaid spend is managed, although ~70% of enrollees are in a managed care plan.  As higher cost patients are folded under private coverage, state savings are substantial.


Roughly 69% of US Medicaid enrollees in managed care




Still big savings opportunity as only ~46% of $600B US Medicaid spend under managed care




Significant scope for further MCO consolidation with >50% of the market highly fragmented

Medicaid is the largest budget item for many states, so curbing inflation is a top priority

Medicaid largest % of state spend

Medicaid spend grown over time