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Why Evolent Health Shares Are Tanking Today

By Keith Speights - Nov 27, 2019 at 12:15PM

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A major contract loss in Kentucky is weighing heavily on the managed-care stock.

What happened

Shares of Evolent Health ( EVH 4.22% ) were tanking by 37.3% as of 11:33 a.m. EST on Wednesday. The huge drop came after the company announced that its partner, Passport Health Plan, wasn't awarded a managed Medicaid contract in Kentucky.

So what

The steep drop in Evolent Health's share price today stems from the fact that Passport Health Plan is more than just a partner to the company. Evolent Health announced in May that it's acquiring a majority stake in Passport Health Plan, paying $70 million for a 70% interest in the Medicaid managed-care company.

Piece of paper with contract printed on it torn into two pieces

Image source: Getty Images.

Passport is based in Kentucky. The failure to win the Kentucky managed Medicaid contract is a huge blow to the company. And it's a big blow for Evolent Health, with its transaction for buying a big stake in Passport scheduled to close by the end of this year.

However, Evolent Health knew there was a real possibility that Passport wouldn't win the Kentucky contract. In the company's Q3 conference call earlier this month, Evolent Health CEO Frank Williams noted that Passport's services growth in 2020 could be slashed from 20% to 10% if the Kentucky deal fell through.

Now what

It's not over yet. Passport plans to protest the decision by the state of Kentucky. Evolent Health, of course, is supporting this protest. Williams said that "this decision, if upheld, is detrimental to the health and well-being of the residents of the Commonwealth of Kentucky." And it's definitely detrimental to the health and well-being of Evolent Health.

The loss of the Kentucky contract for Passport -- and, by extension, Evolent Health -- shows why investing in healthcare stocks isn't always the slam-dunk that it might seem to be.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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