Since the inception of the contract, we have been in discussions with the [state] about our concerns with the Medicaid managed care program but have been unable to resolve our differences. Consequently, we do not believe there is a viable path to a sustainable managed care program in Kentucky.

Centene expects to record a pre-tax premium deficiency reserve of $60 to $70 million related to the issue in the third quarter of 2012, which ended September 30th. The company expects its forecast to remain as stated, excluding the establishment of the reserve. The consensus earnings per share (EPS) estimate for the third quarter is $0.46 on revenue of $2.23 billion.

Centene lowered its full-year guidance in June based in part on its difficulties in Kentucky. Two other insurers, WellCare Health Plans Inc. (NYSE: WCG) and Coventry Health Care Inc. (NYSE: CVH) will continue to offer Medicaid managed care programs in the state.

Shares of Centene are up 10.6% today at $38.69 in a 52-week range of $24.26 to $50.98.

Paul Ausick

Here is where the deal raises some eyebrows.  AMERIGROUP Corporation (NYSE: AGP) is up a whopping 37.9% at $88.74 with a $4.3 billion market cap and prior 52-week range of $37.57 to $75.18.  The market is expecting more mergers to come in the healthcare and insurance field, and frankly it should only expect more consolidation in the sector.  For an insurance to mitigate risk of individuals adding coverage only when they are sick or in need of healthcare, the insurance companies can only mitigate that risk by adding a larger customer base.

There is one other thing to consider here in this analysis.  Healthcare insurance companies are not really healthcare companies.  They are financial service companies that have to navigate premiums and risk around the healthcare sector.

Here are the reactions we are seeing elsewhere in the sector among the mid-cap and small-cap players in the field:

Centene Corp. (NYSE: CNC) is up 17% at $34.00 with a $1.5 billion market cap and 52-week range of $24.26 to $50.98.

Coventry Health Care Inc. (NYSE: CVH) is up 2% at $31.14 with a $4.3 billion market cap and a 52-week range of $25.78 to $37.49.

Health Net, Inc. (NYSE: HNT) is up almost 5% at $26.23 with a market cap of $2.1 billion and 52-week range of $20.51 to $41.22.

Molina Healthcare Inc. (NYSE: MOH) is up 12.5% at $25.85 with a $1.07 billion market cap and 52-week range of $13.93 to $36.83.

Universal American Corp (NYSE: UAM) is up 2.5% at $10.66 with a $890 million market cap and a 52-week range of $8.79 to $13.62.

WellCare Health Plans, Inc. (NYSE: WCG) is up over 13% at $60.10 with a market cap of $2.3 billion and a 52-week range of $33.29 to $74.41.

Then there is the reaction in the larger players:

Aetna Inc. (NYSE: AET) is up 2% at $38.38 with a $13 billion market value and a 52-week range of $33.43 to $51.14.

Cigna Corp. (NYSE: CI) is up 2% at $43.45 with a $12.3 billion market cap and 52-week range of $38.79 to $52.95.

Humana Inc. (NYSE: HUM) is up 1% at $77.22 with a $12.5 billion market cap and 52-week range of $65.20 to $96.46.

Again, all you have to do is go talk to anyone in the insurance sector.  More healthcare insurance mergers are coming down the pipe.  Insurance is no longer a growth opportunity and the companies in this field can only grow by one of two methods.  They can take business away from each other with lower and lower quotes or they can merge to grow their book of business to become that much more defensive.

Unitedhealth Group, Inc. (NYSE: UNH) is even up 0.4% at $56.05 and it has a $58.5 billion market cap and a 52-week range of $41.27 to $60.75.  It has made acquisition after acquisition and now you have to assume that other insurers are going to try to catch up to the company’s massive market value.

After the merger wave is done, there may very well only be a small number of large companies competing for healthcare insurance on a national scale.  Imagine the day that “too big to fail” pertains to your healthcare insurance provider rather than just your big bank.  If you haven’t been told about the coming wave of insurance mergers yet then consider this your notice.  There is simply no other likely outcome unless the new healthcare laws are thrown out in 2013.

JON C. OGG

The US dollar index rose slightly today, now up 0.01% at 82.523. The GSCI commodity index is down -0.06% at 582.95, with commodities prices mostly lower today. WTI crude oil closed down -1.7%% at $82.7/barrel. Brent crude trades down -2% at $97.49/barrel. Natural gas fell about -3.5% today to $2.217/thousand cubic feet. Gold settled up 0.3% today, at $1,596.80/ounce.

The unofficial closing bells put the DJIA down nearly 143 points to 12,411.31 (-1.14%), the NASDAQ fell nearly 49 points (-1.7%) to 2,809.73, and the S&P 500 fell -1.26% or nearly 17 points to 1,308.93.

There were several analyst upgrades and downgrades today, including AK Steel Holding Corp. (NYSE: AKS) cut to ‘sell’ at Goldman Sachs; Duke Energy Corp. (NYSE: DUK) raised to ‘outperform’ at Credit Suisse; Weyerhaeuser Co. (NYSE: WY) raised to ‘Conviction Buy’ list at Goldman Sachs; Southern Co. (NYSE: SO) cut to ‘neutral’ at Credit Suisse; and EMC Corp. (NYSE: EMC) raised to ‘buy’ at Cantor Fitzgerald.

Earnings reports since markets closed last Friday have been scarce, but here are some price changes for reporting companies as of the last half hour of trading today: Uranium Energy Corp. (AMEX: UEC) is down -10.9% at $1.89 after setting a new 52-week low of $1.88 earlier and AEP Industries Inc. (NASDAQ: AEPI) is up 4.2% at $36.36 after posting a new 52-week high of $37.65.

Tomorrow we are scheduled to have earnings from Michael Kors Holdings Ltd. (NYSE: KORS), FactSet Research Systems Inc. (NYSE: FDS), and Shanda Games Ltd. (NASDAQ: GAME). After markets close today we’ll get earnings from Finisar Corp. (NASDAQ: FNSR) and Majesco Entertainment Co. (NASDAQ: COOL).

Other standouts from today include the following stocks:

EnergySolutions Inc. (NYSE: ES) is down -55.7% at $1.59 after posting a new 52-week low of $1.55. The nuclear waste management company issued new, lower guidance today. More coverage here.

Nokia Corp. (NYSE: NOK) is down -8% at $2.78. Samsung Electronics said bluntly that it was not going to buy the Finnish handset maker. More coverage here.

Centene Corp. (NYSE: CNC) is down -21% at $28.00 after posting a new 52-week low of $24.31 earlier today. The managed health care company revised guidance downward. More coverage here.

Stay tuned for Tuesday. We have also noted the following event (all times Eastern):

• 7:30 a.m. – National Federation of Independent Businesses optimism index
• 8:30 a.m. – Import and export prices
• 11:30 a.m. – 4-week bill auction
• 1:00 p.m. – 3-year note auction
• 2:00 p.m. – Treasury budget

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Paul Ausick

Today, Centene revised its EPS guidance down by more than $1/share, from $2.64-$2.84 to $1.45-$1.65 on what the company called “negative financial results” in Kentucky and Texas. The company now projects a loss in the second quarter, but says profitability will return in the third quarter. The consensus estimate for the second quarter had been EPS of $0.58 and for the full year EPS of $2.68. Centene is also considering taking a non-cash impairment charge on its Celtic individual health policies of $28 million, which is not included in today’s revised guidance.

For the past 12 months, Amerigroup Corp. (NYSE: AGP) shares are down nearly -16% compared with Molina, down about -16.5% and Centene down -21%. Providers Wellcare Health Plans Inc. (NYSE: WCG) and Unitedhealth Group Inc. (NYSE: UNH) are up 8% and 20%, respectively.

Centene attributed the revised guidance to higher costs and significantly more non-inpatient claims in May. Ultimately Centene will be forced to raise premiums to cover rising costs, and so will Molina and probably the others as well. The upward spiral of US health care costs continues.

Paul Ausick

The Ohio Department of Jobs and Family Services has reportedly not selected Molina’s Ohio health plan to participate in a freshly issued Ohio Medicaid Managed Care Plan Request for application.  Molina’s filing disclosed the apparent contract loss and it appears as of now that the existing contract that Molina has with Ohio will expire at the end of 2012 without being renewed.  Molina shares are down 22% at $27.15 against a 52-week range of $13.93 to $36.83.  Centene is also listed as one of the losers here and its shares are down 12.6% at $44.41 against a 52-week range of $25.28 to $50.40.

The Wall Street Journal also noted that AMERIGROUP Corporation (NYSE: AGP) and WellCare Health Plans, Inc. (NYSE: WCG) are not being awarded new contracts in Ohio but that Centene was planning an effort to appeal the decision that would impact 9% of the 1.8 million members.  WellCare is down 6.6% at $69.35 against a 52-week range of $33.29 to $74.41.  AMERIGROUP shares are down the least with a drop of 4.7% at $64.22 against a 52-week range of $37.57 to $75.74.

These individual state contract losses are not always set in stone due to appeals and due to lobbying efforts.  That being said, you can clearly see here how state contract awards and losses allow many companies to live by the sword and die by the sword.

JON C. OGG

Large insurers like Wellpoint Inc. (NYSE: WLP), UnitedHealth Group Inc. (NYSE: UNH), Aetna Inc. (NYSE: AET), and Cigna Corp. (NYSE: CI) are in hot pursuit of opportunities to offer management services to state-run Medicaid programs, in the belief that a slew of new customers will more than offset any losses attributable to the ACA. Politicians continue to squabble over ideology, with the conservatives seeking to kill the ACA and liberals wanting to maintain it.

The insurance companies know what they want. Wellpoint posted EPS of $6.94 in 2010 and has reiterated its guidance for EPS of “at least” $6.30 in 2011. The company has also declared a quarterly dividend of $0.25, beginning with the current quarter, and has announced that it will buy back some $1.6 billion in shares by the end of 2011.

Wellpoint is the largest provider in the managed-Medicaid market, and by virtue of its size will be a formidable competitor to the other leading managed-Medicaid providers. Other leading managed-Medicaid providers include Centene Corp. (NYSE: CNC), Amerigroup Corp. (NYSE: AGP), WellCare Health Plans, Inc. (NYSE: WCG), and Molina Heathcare Inc. (NYSE: MOH). None of these has a market cap of more than about $2.5 billion, about a tenth the size of Wellpoint.

Of the large providers, Aetna has forecast 2011 operating profit of $3.70-$3.80/share, compared with $3.68 in 2010. The company, like Wellpoint, UnitedHealth, and Cigna, experienced lower health care use in 2010. That is surely the result of higher premiums, higher deductibles, and fewer visits to the doctor from those insured.

Six states already have a requirement that Medicaid patients enroll in managed care plans, and another ten have similar programs under consideration. Under the managed care plans, Medicaid payments will go to the plan administrators, not directly to doctors, hospitals, and nursing homes as is currently the case in most states. In a managed care system, the states pay a fixed amount to the insurer for each Medicaid patient. Then its up to the insurer to manage costs.

The argument against the managed care plans is that because the goal is to keep costs down, patients have difficulty getting the care they need.

The vast new market open to insurers by way of managed Medicaid plans is likely to be the driver of insurers’ profits through 2014. Higher premiums, higher deductibles, and lower health care use will also contribute to insurers growth, at least for the next year or two. But if the ACA is not repealed or starved financially, premiums should start to moderate, deductibles should get smaller, and patients should begin consulting their doctors again, without driving government costs through the roof.

Paul Ausick

Reuters:   Pressure to investigate mortgage practices has begun to build for banks.

Reuters:   South Korea warned about trouble in the FX market.

Reuters:   Microsoft (NASDAQ: MSFT) is about ready to launch new phones with AT&T (NYSE: T)

Reuters:   Sinochem (NYSE: SNP) and Canadian pension funds may make a counter-offer for Potash (NYSE: POT)

Reuters:   Some nations involved in the IMF want the fund to be tough on large shareholders such as the US.

Reuters:   Earnings will not be able to get the market to focus on much more than Fed plans.

Reuters:   Monetary policy has done less and less to affect economies.

Reuters:   Gold remained near record levels as oil topped $83.

Reuters:   M&A activity has increased in the social game industry.

Reuters:   The Daily Beast and Newsweek are closer to a merger.

Reuters:   There is strong early demand for the AIA IPO.

WSJ:   Companies hire new workers more slowly that in the past, according to Manpower.

WSJ:   A delay in the foreclosure market could badly hurt the housing market.

WSJ:   High bonus agreements may hurt Wall St. earnings.

WSJ:   The Business Council will gather and plan to suggest better measures to improve the economy.

WSJ:   The IMF may lengthen the term of its loan to Greece.

WSJ:   A new service may allow web surfers to save ads that they may want to use later.

WSJ:   CEOs are deferring major decisions due to the economy.

WSJ:   eFinancialCareers reports that bankers are still optimistic about their bonuses.

WSJ:   Ebay’s (NASDAQ: EBAY) has weapons to hit Amazon.com’s apps business including PayPal.

NYT:   Marketers have gained more access to web surfer’s privacy data.

NYT:   Twitter may become as  important of an ad buy as Facebook.

NYT:   Bloomberg will create a data-base on the detail of government operations.

FT:   The IMF came to no conclusion on currency wars.

FT:   Wal-mart (NYSE: WMT) will shortly launch its small store plan

Bloomberg:   The Irish treasury will use $28 billion to prevent a Greece-like collapse.

Bloomberg:   OPEC will probably keep up current crude output.

Douglas A. McIntyre