By Mackenzie Tatananni
Low profit margins in Medicaid have weighed on managed-care stocks, but the pressure is likely to ease this year, clearing a path for future gains.
That's according to BofA Securities. The firm on Wednesday upgraded Elevance Health to Buy from Hold and double-upgraded both Centene and Molina Healthcare to Buy from Sell.
In BofA's view, "Medicaid margins are likely bottoming in 2026 and the return to target margins are more a matter of time and math" as state data slowly catches up to risk pool and trend shifts in 2024 and 2025. This will clear the way for better rates and margins in 2027, analysts wrote.
Elevance, Centene, and Molina are all examples of managed care organizations (MCOs) that contract with state governments to administer Medicaid benefits.
States have a legal obligation to set rates that allow plans to meet target margins, but they must balance that obligation with budget pressures, fears of overpaying, and bureaucratic hurdles that cause delays in responding to rising cost trends or worsening risk pools.
The rates paid to MCOs are based on historical data. Due to the challenging environment in 2024 and 2025, the result is a so-called trough year for earnings, analysts said.
However, rates should begin to catch up in 2027 as more recent data are captured and risk pools stabilize. Consequently, investors should expect above-average earnings growth from 2027 through 2029, the firm continued.
Centene and Molina in particular should see significant upside over the next three years, analysts said, adding that "a large amount of the move tends to happen in Year 1 as confidence in that trajectory builds."
The outlook isn't entirely rosy: BofA analysts still anticipate near-term risks such as volatility in the health insurance marketplace. The second quarter will be "a big proof point," the firm wrote.
MCOs typically get more clarity on cost trends as time passes, and the second quarter "is when they will likely feel more comfortable letting upside flow through, potentially setting the stage for larger beats and raises."
For the ever-wary investor, Elevance is a more conservative way to gain exposure to the trend. BofA believes it offers "less risk given its diversified business mix but still compelling upside potential."
All three stocks are in the green for the year, though some have climbed higher than others. Centene has gained nearly 31%, while Molina and Elevance are up 13% and 6.1%, respectively.
The outlook for managed-care players brightened significantly at the start of April. While the sector struggled earlier in the year due to high medical costs, stocks rallied once the Centers for Medicare and Medicaid Services reached a more favorable Medicare Advantage rate decision than investors had anticipated.
Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 29, 2026 14:06 ET (18:06 GMT)
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