Molina Healthcare shares fell by 20%: Reasons.

Molina Healthcare (MOH) shares fell more than 20% in value during the first hour of trading on Thursday morning. The company announced that it significantly missed its earnings per share (EPS) expectations for the third quarter, attributing the reason to rising medical costs.

The adjusted EPS for Molina for the third quarter was reported at $1.84. This is more than 50% below the analysts' expectation of $3.89. The company also set its adjusted earnings forecast for the fourth quarter at $0.35; this is well below analysts’ estimate of $2.42.

At the core of the problem is the ratio between premium revenue and medical expenses, a metric that Molina refers to as the "medical care ratio" (MCR). Molina collects premiums from its customers for health plans and then uses that money to cover their medical treatment expenses. The difference between these two figures is an important metric for determining profitability.

According to the Corporate Finance Institute, an acceptable range for a good MCR is typically between 80% and 85%. However, Molina's consolidated MCR was reported at 92.6% across all plan offerings in the third quarter; this is up from 89.2% in the same quarter last year. Rising medical expenses are eating into the company's profit margins.

A 92.6% ratio means that only 7.4% of each dollar of premium revenue is left after covering customers' medical expenses to reinvest back into the business. Another problem for Molina is the high rate at which customers utilize their plans.

Molina CEO Joseph Zubretsky stated in the company’s third quarter earnings call, "As medical cost trends continue to rise beyond 2025, our MCR has increased each quarter. The rate updates and risk corridors we received later in the year did not provide adequate cushioning."

Under the Affordable Care Act (ACA), the rapidly growing share of health plans offered by Molina has become a significant concern for the company. For the third quarter, Molina's MCR for ACA plans was set at 95.6%, which is well above the analysts' quarter estimate of 86% and last year's 73% rate.

Another insurance company, Centene (CNC), which has a similar customer base, raised its ACA-specific expense ratio from 73.4% to 90.6% in the second quarter. Centene will report its third quarter earnings on October 29.

Federal laws require that ACA ratios be at least 80%, thus preventing companies from making excessive profits per policy. While the market plans represent only 10% of Molina's total revenue, these plans have a significant impact due to the loss of low-income and high-medical-expense customers. The company's revenue shortfall related to costs accounts for half of this, according to CFO Mark Keim.

During government shutdowns, ACA costs are currently causing issues in Washington. The federal subsidies that came into effect in 2021 will expire by the end of 2024. If these subsidies end, it is expected that the premium costs for plan participants could double. According to the Kaiser Family Foundation, the removal of these subsidies could cause millions of Americans to drop their health insurance.

As of 2024, approximately 21.4 million Americans were insured under ACA market plans. This situation poses a challenge for health insurance providers — particularly companies like Molina, Centene, and Oscar Health, for whom ACA plans constitute a significant portion of their portfolio.

Zubretsky stated, "Our consolidated MCR of 92.6% reflects a very challenging medical cost environment in the third quarter. All these cost trends are a decisive factor for our business."

If the subsidies are removed, not only will insurers lose premium revenue, but customers with serious and costly medical conditions may also be less willing to forgo insurance coverage. In 2024, it is reported that insured individuals with "high-cost claims" accounted for more than 30% of total health expenses.

Molina's premium-to-expense ratio outside of ACA offerings was recorded at 93.6% and 92% for the quarter, compared to 89.6% and 90.5% last year. Molina is not the only one feeling the pinch; Centene has increased the health benefits ratio across all its services from 87.6% to 93%. Oscar Health, on the other hand, has risen from 79% to 91% in the second quarter. Oscar Health will report its third quarter earnings on November 6.

The major insurance company UnitedHealth Group (UNH), although less exposed to ACA costs than other health companies, came under pressure from investors after cutting its earnings estimates for the year. This led to a 22% drop in the company’s stock, marking its largest single-day decline since 1998. UnitedHealth raised its premium-expense ratio from 85.1% to 89.4% in the second quarter. The company plans to announce its third-quarter figures on October 28.

Molina leaders mentioned in the company's earnings call that medical cost trends are expected to stabilize through 2026, which could allow the insurer to expand its margins. Zubretsky said, "In any business, there are negative sides to medical cost trends, and this is true in all areas of our business. Everything depends on cost trends."