Why Centene Shares Spiked

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Medicaid-based health insurer Centene (NYSE: CNC  ) soared as much as 13% in intraday trading Wednesday after announcing it would be terminating its Medicaid contract with the state of Kentucky.

So what: This is one of those head-scratching cases where it's actually good news that a company was able to terminate a contract. The reasoning behind that are the extremely high costs associated with doing business in Kentucky that had pushed Centene into previous quarterly losses. Without Kentucky in the mix, Centene's revenue stream will dip, but its earnings quality is likely to rise.

Now what: Now we wait to see if Centene and its primary rival Molina Healthcare (NYSE: MOH  ) will take action in other higher-cost states. Higher medical costs in Texas, for instance, caused Molina to dip into the red in its most recent quarter. If health insurers aren't getting terms that are beneficial to them, they could eventually walk, ultimately leading to fewer choices and higher prices -- which is good for no one.

Craving more input? Start by adding Centene to your free and personalized Watchlist so you can keep up on the latest news with the company.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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