Why This Health Insurer Dropped Today

Vanguard Health Systems (NYSE: VHS  ) was trading down more than 9% early Monday following news that the company wouldn't receive a Medicaid contract in Arizona. The loss represents a small portion of Vanguard's overall revenues, but will nearly wipe out the company's Health Plan segment.

So what?
Vanguard announced via press release that its primary Medicaid acute care contract in Arizona won't renew after its Sept. 30 expiration. The denial came from the Arizona Health Care Cost Containment System, or AHCCCS, and was presumably related to the financials of Vanguard's bid.

The company's Phoenix Health Plan subsidiary served nine counties and included about 186,000 members at last year's end. PHP accounted for 80% of the health plan segment, bringing in revenues of $635.9 million in fiscal 2012.

Vanguard filed a petition asking the AHCCCS to maintain its contracts in two of the largest counties it served. A decision is expected by month's end, but an approval would only mean that current customers can continue with PHP. New enrollments would remain prohibited.

Other insurers have fared better with the state. Health Net (NYSE: HNT  ) and UnitedHealth (NYSE: UNH  ) both announced new Medicaid contracts in Arizona. 

Vanguard will maintain a minimal presence in the state with a small Medicare and dual-eligibility program. But Affordable Care Act changes could impact that project as well.

Foolish final thoughts
PHP accounted for 13% of Vanguard's overall revenues, so the loss will sting and wipe out most of a diversification arm. But the company's primary business remains hospitals and acute care centers. The numerous changes rolling out with the ACA have investors nervous, and signs of weakness are bound to cause a scurry.

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