Centene (CNC): Why a Tough 2025 Could Set Up a Better 2026

Date: 2025-08-17

TL;DR

What it is: Centene is a health-insurance company focused on government-backed programs—Medicaid, Affordable Care Act (ACA) exchanges, and Medicare Advantage (MA).
What just happened: 2025 turned messy for the entire ACA market. Sicker-than-expected members and rule-driven payments (“risk adjustment”) squeezed profits. Medicaid costs also ran hot. Centene cut guidance and posted a rare loss.
Our view: This looks cyclical, not fatal. Pricing is resetting across the industry for 2026, a major competitor is exiting the ACA market in 2026 (which eases price wars), and Centene’s Medicare “Star” quality scores are improving, which helps revenue.
Recommendation: BUY with a 12-month target price of $38 (about one-third upside from the high-$20s). Key risks: policy changes to ACA subsidies, another year of worse-than-planned medical costs, or slower Medicaid rate catch-ups.

The Story

Think of health insurance as a weather business. Some years bring perfect sunshine (healthy members, predictable costs). Some years bring storms (sicker members, expensive drugs, delayed payments). 2025 was a storm year—not just for Centene, but across the ACA individual market.

Two things hit at once:

ACA risk adjustment swung hard. The government evens things out between insurers: if your members are sicker than average, you receive money; if they’re healthier, you pay. In 2025, the industry data shifted in a way that reduced net payments for Centene and several peers. That directly hurts profits.
Medicaid costs stepped up. Post-pandemic, states re-checked eligibility (“redeterminations”). The people who stayed enrolled tended to be higher-need. Add behavioral health and high-cost drugs, and medical costs ran ahead of the rates states had set.

Result: Centene guided down and printed a mid-year loss. The stock fell. Understandable.

But storms pass—and, crucially, pricing resets.

Why We Think 2026 Looks Better

ACA “price reset” is underway. Insurers are filing meaningfully higher 2026 premiums after learning the hard lessons of 2025. One large competitor (Aetna/CVS) plans to exit ACA individual plans in 2026, which usually improves price discipline. Centene, the #1 share player on the exchanges, tends to benefit when the market gets rational again.
Medicaid rate catch-ups happen—slow, but real. States don’t ignore persistent cost inflation; they typically revisit rates over the next contract cycles. 2025’s pain sets the starting line for 2026 negotiations.
Medicare Advantage “Star” scores are improving. Better Stars → quality bonuses → higher revenue per member in 2026. MA is smaller than Centene’s ACA/Medicaid book, but the dollars are high-margin and help on the edges.

Put simply: 2025’s problems force the fixes that show up in 2026.

The Bet, Boiled Down

Centene doesn’t need perfection—just a return to sensible pricing and fair reimbursement. If 2026 premiums and Medicaid rates reflect 2025’s reality, earnings should rebound from 2025’s trough.

How We Value It (No Jargon, Just Logic)

We frame 2026 as a “repair year”:

Base case (most likely): 2026 earnings power around $3.75 per share after ACA pricing resets, partial Medicaid catch-ups, and MA quality bonuses. Apply a 12× earnings multiple (still a discount to blue-chip peers) and modestly discount back → $38 target.
Bull case: Faster normalization (stronger ACA pricing, better Medicaid rates) lifts earnings to ~$5.00 → fair value ~$55.
Bear case: ACA subsidies expire without renewal and demand softens, or medical costs surprise again → ~$2.50 of earnings → fair value ~$25.

Today’s price in the high-$20s bakes in a lot of bad news. That gives you a valuation cushion if the repair takes longer, and meaningful upside if the reset works.

What Could Go Wrong (and What It Would Look Like)

Policy risk (ACA subsidies). The enhanced subsidies that made ACA plans cheaper are scheduled to expire at end-2025 unless extended. If they lapse, some healthy members may drop coverage in 2026. You’d likely see lower membership and a tougher pricing/mix puzzle.
Another year of hot medical costs. If behavioral health or specialty drugs keep accelerating faster than pricing and state rate actions, margins heal slowly.
State budgets/reviews lag. Medicaid is negotiated state-by-state. If states delay or under-shoot rate increases, cash flow improves late.
Stars/back-office execution. MA Stars are better, but sustaining them requires ongoing execution. Any slip reduces the quality bonus tailwind.

What to Watch (Simple Scorecard)

ACA 2026 final rates (late summer to early fall filings): Are price increases as strong as preliminary reads suggest?
Competitor actions: Follow-through on announced ACA exits or retrenchment.
State Medicaid rate actions: Evidence of rate catch-ups in large states.
Quarterly medical cost trend (“HBR/MLR”): A clear step down from 2025’s peak would confirm the turn.
MA Star updates (October): Holding or improving would lock in 2026 bonus revenue.

Jargon Decoder

ACA exchange/Marketplace: The online market where individuals buy health plans, with government subsidies for many buyers.
Risk adjustment: A leveling payment system so plans with sicker members get paid more and plans with healthier members pay in.
Medicaid: State-run coverage for low-income populations; insurers like Centene run the care networks for a fixed monthly rate.
MA Stars: Medicare’s 1–5 star report card. Higher stars → bonus dollars.
HBR / MLR: Share of premium spent on medical care. Lower is better for profits—but too low triggers rebate rules.

Positioning and Timeframe

Who this suits: Investors who can tolerate policy headlines and a few quarters of noise.
Time horizon: 12–24 months—long enough for 2026 pricing and state rates to show up in the numbers.
Sizing: Start small-to-medium and add on evidence (e.g., ACA final rates, Medicaid rate wins, HBR trending down).

Bottom Line

2025 bruised the whole ACA market, not just Centene. That pain is exactly what resets pricing and negotiations. With industry capacity pulling back, Stars improving, and rates resetting into 2026, the setup skews positively from a depressed base.

This is an investment view, not personal financial advice. Consider your risk tolerance and portfolio mix.