(Reuters) - Centene Corp (CNC.N) said on Tuesday its deal for WellCare Health Plans (WCG.N) could close sooner than previously expected and posted a profit that edged past Street estimates, reassuring investors of strength in its core Medicaid business.
Shares of the company rose 6.5% to $48.79 in early morning trading.
Although medical costs grew year-over-year and missed analysts’ expectations, Centene said costs for its Medicaid health plans for low-income Americans remained stable.
Membership in Centene’s Medicaid health plans increased by 61,800 to more than 8.7 million since last year and the company said new contracts with certain states helped offset weaker enrollment from a few.
In the third quarter, Centene’s health benefits ratio (HBR), amount it spent on medical claims versus income from premiums, worsened to 88.2% from 86.3% a year earlier, missing estimates of 87.62%.
Centene said medical costs were impacted by an industry-wide fee that was suspended for 2019 and seasonal factors that affected its Obamacare business.
On a conference call with analysts, Chief Executive Officer Michael Neidorff said the company expects rates on premiums paid by Medicaid state contracts to better align with the new patient mix in the long term.
A growing economy has lately altered the patient mix that Centene’s Medicaid business enjoyed, with people with serious illnesses now forming a greater proportion of its customer base.
“While states have responded with premium rate adjustments ... there can be a timing difference from an HBR perspective,” Neidorff said.
The company said it continues to expect a revenue of over $79 billion and adjusted earnings of $4.79 per share in 2020, excluding the impact of the WellCare acquisition.
“Investors were pleased that Centene has at least endorsed the outlook that they had (forecast earlier) and provided more visibility into the 2020 expectations,” Stephens analyst Scott Fidel said.
Despite higher medical costs than expected, the company’s core underlying business seems to remain “right on track”, he added.
Centene is hoping its $15.27 billion buyout of WellCare will help it scale up its government-backed Medicare and Medicaid businesses. The company said it had received conditional approvals from all but two states and that the transaction may be completed earlier in the first half of 2020.
Excluding items, Centene earned 96 cents per share, narrowly beating the consensus estimate of 95 cents, according to IBES data from Refinitiv.
Total revenue rose 17% to $18.98 billion, ahead of estimates of $18.43 billion.
Reporting by Saumya Sibi Joseph and Tamara Mathias in Bengaluru; Editing by Shinjini Ganguli