Managed Care Provider Gets Buckeye Black Eye

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After the state of Ohio dropped Molina Healthcare Inc. as manager of much of its Medicaid program, shares of the Long Beach managed care provider plunged last week.

The action prompted two analysts to downgrade the stock to “hold” and made Molina the largest decliner on the LABJ Stock Index for the week ended April 11. Shares closed down nearly 29 percent to $24.76. (See page 32.)

Molina, which specializes in poor and elderly patients, was stripped of management of the program because the state said it had scored lower than other insurers in a new evaluation.

Analysts who cover the company were surprised by the Ohio action, and believe the Molina will file an appeal based on problems with the scoring system used to evaluate contenders.

Joseph France at Cantor Fitzgerald of New York, one of two analysts who downgraded Molina shares, said the company will be challenged to replace the $1 billion in premium revenue it received from the contract. The company’s total revenue from premiums last year was $4.6 billion.

“Molina’s exclusion from the program is especially surprising because they’ve been in the state since 2005 and by all accounts have a good reputation there and good relations with the state,” France said.

Despite the anticipated revenue loss, Molina affirmed its previous guidance for fiscal year earnings of $1.75 a diluted share.

In addition to California and Ohio, Molina operates Medicaid managed care plans in eight other states, including Florida, Michigan and Texas. As of Dec. 31, it served about 1.7 million members who are eligible for Medicaid, Medicare and other government-sponsored health programs.

Ohio, which decided to streamline its Medicaid programs to save money, announced this month that it had chosen two new companies to administer its Medicaid program, which is financed jointly by the state and federal governments.

Ohio plans to merge eight managed-care regions within the state into three, with Aetna Inc. in Hartford, Conn., and regional provider Meridian Health Plan added for the first time as providers.

Earlier this year, Missouri dropped a smaller Molina contract the company had shared with other providers for 16 years, also as part of a cost-saving consolidation. The company’s lawsuit against the state is pending.

Analysts Sarah James at downtown L.A.-based Wedbush Inc. has maintained her “outperform” rating on Molina. She said in a note to clients that Molina could successfully appeal the Ohio decision because it arbitrarily favored new contractors.

“An unusual criteria in the award formula heavily penalized incumbent plans,” James said. “We believe the formula to be illogical and see potential for protests.”

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