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Why Centene’s Health Benefit Ratio Improved in 1Q17

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Health benefit ratio guidance

Centene (CNC) has projected its health benefit ratio (or HBR) for the full year 2017 to fall in the range of 87.0% to 87.5%. The company has also estimated medical cost trends to grow in the low single digits in 2017.

If Centene manages to surpass these HBR projections in 2017, it could have a favorable impact on the company’s stock as well as the iShares Core S&P 500 ETF (IVV). Centene makes up about 0.06% of IVV’s total portfolio holdings.

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Health benefit ratio in 1Q17

In 1Q17, Centene’s HBR was ~87.6%, which is year-over-year (or YoY) improvement of around 110 basis points. This improvement was mainly a result of the reduction in Centene’s exposure to the high-cost Medicaid business mainly due to its new businesses from the Health Net acquisition. Further, Centene has also grown its exposure to the health insurance marketplace segment in 1Q17.

However, Centene’s HBR ratio in 1Q17 was higher than that in 4Q16 by around 280 basis points. The increase was mainly due to increased revenues in 4Q16 on account of retroactive changes to the minimum medical loss ratio calculation under the California Medicaid expansion program.

Further, there were more reported flu cases in March 2017, which increased the company’s costs as compared to the previous year and resulted in higher Medicaid HBR in 1Q17. However, this increase was partly offset by the company’s lower commercial HBR, as these plans can subsidize their expenses through features such as deductibles and copays.

Peers such as UnitedHealth Group (UNH), Aetna (AET), and Anthem (ANTM) have also implemented several measures to reduce their HBR ratios in 2017.

In the next article, we’ll discuss Centene’s Health Insurance Marketplace business in greater detail.

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