What happened
Shares of Evolent Health (EVH -0.07%) 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.
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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.
