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Evolent Health (EVH) Shares Cut in Half as Partner Passport Loses 20+ Year Kentucky Managed Medicaid Contract

November 27, 2019 10:54 AM EST

Shares of Evolent Health (NYSE: EVH) were nearly cut in half Wednesday after merger partner Passport Health Plan received notification from the Kentucky Cabinet for Health and Family Services (CHFS) that Passport has not been awarded a Kentucky managed Medicaid contract for the next contract period, which commences July 1, 2020.

The news was seen as a major disappointment since Passport Health Plan has a 22-year legacy of service to Kentucky and its Medicaid beneficiaries.

"This is a disappointing outcome for our long-standing partner, Passport Health Plan, which has a 22-year legacy of service to the Commonwealth of Kentucky and its Medicaid beneficiaries," Evolent spokesperson Kim Conquest commented.

Analysts echoed the disappointment. "This is a major disappointment and a surprise since Passport Health Plan had worked with the state for 20+ years," KeyBanc Donald Hooker analyst commented. "It was also the second largest health plan in the state."

Passport management has indicated to Evolent its intent to protest the decision.

"We firmly believe this decision, if upheld, is detrimental to the health and well-being of the residents of the Commonwealth of Kentucky and we fully support Passport's intent to protest this outcome," said Evolent Health Chief Executive Officer Frank Williams.

"We support Passport’s decision to protest this outcome in an effort to keep its provider-centric, locally-driven health and wellbeing initiatives available to low-income families, people with disabilities, underserved children, and others served by Passport programs," DeForest added. "We remain committed to serving Passport through the current MCO contract term of June 2020, and we will continue to support efforts to keep the plan on solid financial footing."

The winning health plans for the Kentucky managed Medicaid contract were Humana (NYSE: HUM), Wellcare (NYSE: WCG), and CVS/Aetna (NYSE: CVS), as well as two new plans, United Healthcare (NYSE: UNH) and Molina Health Care (NYSE: UNH)

Evolent Health agreed to acquire Passport Health Plan in May 2019 and Hooker noted this contract represented $150 million in run-rate services revenue for Evolent with presumably decent margins.

"This revenue stream will now terminate when the current 5-year contract with the state of Kentucky expires in July 2020," Hooker commented. "On the 3Q19 conference call (November 5), EVH management indicated that if Passport Health Plan did not win the Kentucky renewal, services revenue growth would only be 10% in 2020."

Upon the contact loss, speculation has turned to if Evolent will complete the Passport transaction. The company has already gotten ahead of that speculation, saying it will.

"Per our agreement, we intend to proceed with the pending acquisition as planned and anticipate it will close by the end of this year," the Evolent spokesperson confirmed.

After trading down as much as 47% mid-day, shares have recovered slightly - last down 34% to $7.03.



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