Portrait Weekly Framing: Centene's $1.8B Revenue Hit Exposes Healthcare Cost Inflation Crisis
Welcome to this week's edition of the Portrait Weekly Framing. Today, we'll examine the collapse in Centene Corporation's stock price following the company's withdrawal of 2025 guidance and revelation of massive cost overruns across its healthcare businesses.
The healthcare sector witnessed one of the most dramatic single-day collapses in recent memory when Centene Corporation shares plummeted ~40% in afternoon trading. The managed care giant's decision to withdraw its full-year 2025 financial guidance sent shockwaves through the industry, as the company revealed that preliminary data showed significantly higher-than-anticipated medical costs across both its Affordable Care Act marketplace and Medicaid businesses.
The magnitude of Centene's guidance withdrawal is significant. The company anticipates a $1.8 billion reduction in expected revenue from its ACA marketplace plans alone, translating to approximately $2.75 per share hit to adjusted earnings. This represents a massive deviation from the company's previous forecast of over $7.25 in adjusted earnings per share for 2025. Beyond the marketplace business, Centene also reported rising medical cost trends in its Medicaid operations, particularly for behavioral health, home health, and high-cost pharmaceuticals in key states including New York and Florida.
To understand the full scope of Centene's challenges and what this development means for the broader managed care sector, I decided to use Portrait's Research tool to analyze the key factors behind this dramatic guidance withdrawal and its implications for competitors. I ran the following research query:
Analyze Centene Corporation's recent withdrawal of 2025 financial guidance, focusing on the $1.8 billion ACA marketplace revenue reduction and rising Medicaid costs. What are the underlying drivers of higher-than-expected medical utilization, and how does this impact the broader managed care industry? Additionally, evaluate which competitors may be facing similar pressures and which companies might be better positioned to weather these headwinds.
The analysis reveals that Centene's challenges stem from fundamental miscalculations in both risk assessment and market dynamics, with the company facing a perfect storm of higher medical costs and lower risk adjustment revenues. What's particularly concerning is that these issues appear to be systemic rather than company-specific, with the ACA marketplace showing higher overall morbidity across 22 states representing 72% of Centene's membership. The Medicaid pressures, while more targeted to specific geographies like New York and Florida, suggest ongoing structural challenges in government-sponsored healthcare programs.
Centene Withdraws 2025 Guidance Amid ACA and Medicaid Pressures
On July 1, 2025, Centene Corporation (CNC) withdrew its full-year 2025 financial guidance, a move precipitated by two significant and adverse developments: a material shortfall in expected 2025 ACA Marketplace revenue and an acceleration of medical cost trends within its Medicaid business. The announcement signals a severe dislocation between the company's prior assumptions and the emerging reality of cost and revenue dynamics in its core government-sponsored programs, with significant implications for both Centene and the broader managed care industry.
ACA Marketplace: A Miscalculation of Risk and Revenue
The primary catalyst for the guidance withdrawal was the receipt of preliminary 2025 industry data for the Health Insurance Marketplace from Wakely, an independent actuarial firm. The data, covering 22 of Centene's 29 Marketplace states and approximately 72% of its related membership, revealed two critical issues that fundamentally undermined the company's financial projections.
First, overall market growth in these states was lower than the company had anticipated. Second, and more critically, the implied aggregate market morbidity—a measure of the overall health and expected healthcare needs of the enrolled population—was significantly higher than assumed. This sicker-than-expected risk pool means that the risk adjustment revenue transfers, a core mechanism of the ACA designed to compensate insurers who enroll higher-cost members, will be materially lower than Centene had forecasted.
Based on its preliminary analysis of the 22 states, Centene quantified the negative impact as a reduction to its full-year net risk adjustment revenue transfer expectation of approximately $1.8 billion, which corresponds to an adjusted diluted EPS impact of roughly $2.75. The company noted that it does not yet have data for its remaining seven Marketplace states but anticipates an additional reduction to its revenue expectations given the adverse morbidity trends observed elsewhere. In response, Centene has already begun the process of refiling its 2026 Marketplace rates to reflect the higher projected baseline of morbidity, and it expects to be able to implement corrective pricing actions in states representing a substantial majority of its membership.
Medicaid: Intensifying Cost Trends
Compounding the ACA Marketplace issues, Centene also disclosed a "step-up in medical cost trend" within its Medicaid business. The company identified the same areas of pressure it had previously flagged—behavioral health, home health, and high-cost drugs—but noted that the dynamics became more pronounced in the second quarter. These pressures were particularly acute in specific geographies, such as New York and Florida, and were exacerbated by instances where services were "carved-in" to managed care contracts without sufficient corresponding rate increases or risk adjustment mechanisms to cover the new costs. As a result of these intensifying pressures, Centene expects its second quarter 2025 Medicaid Health Benefits Ratio (HBR) to be higher than its first quarter 2025 HBR of 93.6%.
Underlying Drivers of Higher Medical Utilization
The higher-than-expected medical utilization stems from a confluence of factors that have been developing over the past 18-24 months, which now appear to have accelerated beyond management's forecasts.
Post-Redetermination Acuity Shift: A persistent theme since the unwinding of the COVID-19 public health emergency has been the rising acuity of the remaining Medicaid population. As states completed the redetermination process, members who were disenrolled were generally healthier, leaving a sicker, higher-cost population in the managed care plans. While Centene has been actively negotiating with states for higher rates to match this new acuity level—achieving a 4.5% to 5% composite rate adjustment for the back half of 2024—the July 1 announcement indicates these rate increases have been insufficient to fully offset the cost pressures.
Persistent and Accelerating Cost Categories: The specific cost drivers are not new, but their intensity is. Management had consistently identified "pockets of trend" in behavioral health and home health throughout late 2024 and early 2025. The Q1 2025 earnings call also highlighted an uptick in high-cost drugs. The "step-up" described in the July 1 press release suggests these pockets have widened into more significant and systemic cost challenges.
The "Rejoiner" Dynamic: Throughout the redetermination process, Centene noted that a significant portion of members who were dropped from Medicaid—often for administrative reasons—were rejoining the program later. These members often rejoined when they had a specific healthcare need, creating an artificial pressure on the medical loss ratio, as less than half were reinstated with retroactive premium coverage to offset their claims costs. While the company expected this trend to slow and provide a tailwind into 2025, its lingering effects may be contributing to ongoing cost pressures.
ACA Risk Pool Misjudgment: In the Marketplace segment, the issue is less about utilization trends within Centene's own book and more about a fundamental misreading of the broader market's risk profile. The combination of lower-than-expected market growth and higher-than-expected morbidity across the entire exchange population created a "materially inconsistent" outcome for the risk-adjustment transfer payments that are critical to profitability in the segment.
Broader Industry Impact and Competitive Positioning
Centene's announcement sent shockwaves through the managed care sector, as investors immediately priced in the risk of systemic issues. In after-hours trading on July 1, Centene's stock plunged nearly 24%, while shares of its closest competitor, Molina Healthcare (MOH), fell over 10%. More diversified peers like Elevance Health (ELV), Humana (HUM), and UnitedHealth Group (UNH) also saw declines, albeit more modest ones. The news led to immediate analyst downgrades for Centene, with UBS cutting its rating to Neutral and its price target to $45.
The guidance withdrawal highlights varying levels of exposure and risk across the industry. Companies with a heavy concentration in government programs, particularly the ACA Marketplace and Medicaid, are perceived as most vulnerable to these specific headwinds. Conversely, more diversified players with substantial commercial group, Medicare Advantage, and health services businesses are seen as better insulated.
Given the systemic nature of Centene's challenges and the potential for similar issues across government-sponsored healthcare programs, I wanted to establish ongoing monitoring of how these cost pressures might be affecting other managed care companies. The research revealed that while Centene's issues may be particularly acute, the underlying drivers—higher medical utilization, risk pool deterioration, and inadequate rate adjustments—could impact any company with significant exposure to ACA marketplace or Medicaid programs. To track these developments as they unfold, I set up the following Monitor:
What type of companies are you looking to monitor?: Companies that operate managed care plans, provide health insurance through government programs including Medicaid and ACA marketplaces, or offer Medicare Advantage plans
Datapoints to Find: Medical cost trends and utilization increases, guidance withdrawals or earnings warnings, risk adjustment revenue changes, Medicaid rate negotiations and redetermination impacts, and regulatory changes affecting government healthcare programs.
The initial Monitor summary reveals a deeply fragmented managed care landscape, with some companies experiencing severe cost pressures while others report stable trends. What's particularly striking is the divergence between large, diversified players like UnitedHealth Group—which suspended its 2025 outlook citing "accelerating and broadening" medical costs—and smaller, value-based care specialists like Astrana Health and Clover Health, which report trends "as expected" or even "better than expectations." This bifurcation suggests that Centene's challenges, while severe, may not be universally shared across the industry. However, the regulatory environment has intensified dramatically, with CMS announcing aggressive Medicare Advantage audit expansions and the looming threat of legislative proposals that could strip coverage from nearly 11 million Americans. These developments create a complex investment landscape where company-specific execution and risk management capabilities may matter more than broad sector exposure.
Monitor: Key Themes in Government Healthcare Programs
Recent developments across the managed care sector have been dominated by significant earnings warnings from industry leaders, a sharp increase in regulatory scrutiny, and major legislative proposals threatening the funding structures of both Medicaid and the ACA. While cost trends appear to be accelerating for some, others report stability, creating a bifurcated picture. Below is a real-time synthesis of the key topics based on the latest information.
Medical Cost Trends and Utilization Increases
A clear divergence in medical cost trends is emerging across the managed care industry. On one hand, industry bellwether UnitedHealth Group (UNH) signaled a significant deterioration, suspending its 2025 outlook due to medical expenditures that "continued to accelerate while also broadening to more types of benefit offerings." The company specified that pressure was most acute among new Medicare Advantage (MA) members but that it was seeing "indications of a broadening of this higher trend to other areas." Similarly, Centene (CNC) reported a "step-up in medical cost trend" in its Medicaid business, particularly in behavioral health, home health, and high-cost drugs in key states like New York and Florida.
This narrative of accelerating costs is corroborated by value-based care provider agilon health (AGL), which reported that its adjusted cost trend was running at approximately 7% in Q1 2025, consistent with elevated levels seen in 2023 and 2024, with no signs of deceleration.
However, a strong counter-narrative of stability is coming from other players. Elevance (ELV) and Humana (HUM) both explicitly reaffirmed their 2025 guidance. Humana, while acknowledging and planning for a "continued higher trend," stated that current trends are in line with its guidance and not showing incremental deterioration. A cohort of smaller, value-based care focused plans have been even more positive:
Alignment Healthcare (ALHC) reported that Q1 and quarter-to-date trends were running "better than expectations."
Astrana Health (ASTH) stated it was "just not seeing that acceleration of trend in Medicare Advantage" that others have reported, holding to its 4.5% trend guidance for 2025.
Clover Health (CLOV) described cost trends as "stable and as expected."
Evolent Health (EVH) noted a specific positive datapoint, with oncology cost trends "running below expectations" through May.
Adding to the complexity, Cigna's (CI) Evernorth division announced a new benefit option to expand access to popular GLP-1 weight loss drugs, which could drive higher pharmacy utilization, though the company claims it will lower the net cost for plan sponsors.
In summary, the picture on cost trends is mixed. While large, diversified players like UNH and CNC are experiencing significant, broadening pressure, several other MCOs and value-based care specialists report that trends remain stable and manageable, suggesting the challenges are not impacting all participants equally.
Guidance Withdrawals or Earnings Warnings
The current environment has been defined by two seismic guidance withdrawals from market leaders, which has shattered investor confidence and created significant sector-wide volatility.
First, Centene (CNC) withdrew its 2025 guidance after identifying a preliminary ~$1.8 billion shortfall in expected 2025 net risk adjustment revenue from its ACA Marketplace business. The company cited significantly higher-than-expected market morbidity and lower market growth, a fundamental miscalculation of the risk pool. This event, validated by a subsequent 44% target price cut from UBS, highlighted the severe financial consequences of operational missteps in the ACA program.
Second, and more systemically, UnitedHealth Group (UNH) suspended its 2025 outlook, citing the accelerating and broadening medical cost trends. This was not a company-specific operational issue like Centene's, but rather a signal of a potentially worsening industry-wide utilization environment, which triggered a broad sell-off across all managed care stocks.
In direct contrast to these negative announcements, a number of other major players have made a point to stand by their financial targets. Elevance (ELV) and Humana (HUM) both publicly reaffirmed their full-year 2025 guidance. ELV went further, stating its outlook explicitly incorporates the latest views on cost trends and the regulatory landscape. This wave of reaffirmations from ELV, HUM, and smaller players like Evolent (EVH), Astrana (ASTH), and Clover (CLOV) has created a clear dividing line in the sector between those overwhelmed by headwinds and those signaling confidence in their ability to navigate them.
Risk Adjustment Revenue Changes
Risk adjustment mechanisms in both the ACA Marketplace and Medicare Advantage have become a major source of earnings volatility and strategic focus.
The most dramatic development is Centene's (CNC) guidance withdrawal, which was driven entirely by a massive miscalculation of ACA risk adjustment transfers. The company's preliminary estimate of a ~$1.8 billion revenue reduction, with potential for further downside, underscores the high-stakes nature of accurately forecasting risk pool dynamics in the Marketplace. CNC is now in the process of refiling its 2026 rates to correct its assumptions.
In Medicare Advantage, Humana (HUM) provided a detailed look at its risk adjustment-related challenges. The company faces a severe headwind from a projected drop in its 4+ Star rated plan membership from ~95% in 2025 to just ~25% in 2026. This directly impacts its quality bonus payments, a key component of revenue. Management is planning for this "worst-case scenario" to persist into 2027. Separately, HUM is adapting its clinical models to the new V28 risk model, confident it can overcome the headwind by 2026 but stressing a focus on clinically relevant documentation over simply "chasing diagnosis codes."
Meanwhile, some smaller players like Alignment Healthcare (ALHC) and Astrana Health (ASTH) claim to have less exposure to risk adjustment model changes, suggesting a divergence in business strategy and historical reliance on coding optimization.
Medicaid Rate Negotiations and Redetermination Impacts
This area is currently dominated by significant federal legislative risk rather than specific state-level negotiation updates. The primary company-specific datapoint on rate adequacy came from Centene (CNC), which noted that its rising Medicaid cost trends were exacerbated in some states by "carve-ins of related services without sufficient rate or risk adjustment," a classic sign of reimbursement lagging costs.
On the utilization front, Astrana Health (ASTH) acknowledged that Medicaid utilization remains elevated and is tracking above its reimbursement trend. The company also provided a rare quantification of redetermination-related risk, estimating a "worst case" scenario where stricter eligibility rules in California could impact 20-30% of its Medicaid members, which it views as a manageable financial hit.
The main story, however, is the legislative overhang from Washington. The 'One Big Beautiful Bill' (OBBB) and its Senate counterpart have created significant volatility for Medicaid-exposed MCOs. Proposals to cut the Medicaid provider tax cap to 3.5% in the Senate version initially sparked fears of major state funding disruptions. A significant positive development occurred when the Senate parliamentarian ruled that this provision violated the Byrd rule, making it ineligible for the reconciliation process. This provided a major, though perhaps temporary, relief for the sector. Nonetheless, the risk remains, as the Congressional Budget Office (CBO) estimates the OBBB Act could lead to 7.8 million people losing Medicaid coverage, quantifying the high stakes of the ongoing debate.
Regulatory Changes Affecting Government Healthcare Programs
The regulatory environment has intensified significantly, with multiple new headwinds emerging for the sector.
MA Audits & Investigations: A major negative shock came from CMS announcing an "aggressive and immediate expansion of Medicare Advantage audits," with plans to audit every eligible MA contract annually. This was compounded by reports of a DOJ criminal fraud investigation into UnitedHealth Group's MA business. Together, these actions signal a new era of intense scrutiny and enforcement in the MA program, creating a material overhang for all participants and triggering sharp, sector-wide stock declines.
Legislative Proposals (Medicaid/ACA): As noted previously, the OBBB Act contains provisions that the CBO estimates could cause nearly 11 million people to lose insurance coverage, with the majority coming from Medicaid. This represents the most significant legislative threat to government programs. On a smaller scale, CMS finalized its "Marketplace Integrity and Affordability" rule, which tightens ACA eligibility and is expected to be a modest headwind to enrollment.
Provider Rate Setting: CMS has proposed a substantial (6.4%) net rate cut to the Home Health Prospective Payment System (PPS) for CY2026. This is a major headwind for home health providers and could have downstream consequences for MCOs regarding post-acute care costs and network access.
Positive Inflection (MA Rates): In a rare piece of good news, the finalization of MA rates for CY2026 was received very positively by the market, sparking a broad-based relief rally. This suggests the final rates were better than the market's worst fears, providing a temporary respite from the otherwise overwhelmingly negative regulatory news flow.
To further research Centene, Molina Healthcare, or other managed care companies facing similar pressures, head over to Portrait today!