UPDATE: Kentucky Taps WellCare, Coventry, Centene For Medicaid

The state of Kentucky on Thursday awarded new three-year Medicaid contracts that could add several hundred million dollars in annual sales for WellCare Health Plans Inc. (WCG), Coventry Health Care Inc. (CVH) and Centene Corp. (CNC).

The state said the local expansion of managed care in Medicaid--a government program that provides health care to the poor--will serve more than 560,000 people. Barclays Capital analysts estimated that represents more than $2.4 billion in annual revenue to be divided among the three contract winners and that the companies will start to see an earnings benefit later this year. Services for the contracts start Oct. 1.

Centene projected the Kentucky contract will generate annual sales "in excess of $700 million", while WellCare and Coventry didn't provide financial estimates.

Shares of all three companies traded higher Thursday, with WellCare rising 2.9% to close at $54.96, Coventry up 0.8% at $37.32 and Centene up 3.1% at $37.87. WellCare and Coventry shares have more than doubled over the last year, while Centene has climbed about 80%.

"This is an obvious incremental positive for all three companies, though Centene and WellCare will likely benefit more than Coventry simply because this represents a larger portion of their current business," Barclays said in a note to investors.

Meanwhile, shares of Amerigroup Corp. (AGP), which competes in the market for Medicaid programs, sank 1.8% to close at $73.56.

The companies running Medicaid programs have been banking on rapid expansion despite concerns that state budget issues--states are responsible for Medicaid--could prove disruptive. Kentucky is just one state where Medicaid companies have had a chance to pick up business; Texas and Louisiana also have upcoming decisions, possibly by the end of the summer, Barclays said.

Kentucky's Medicaid managed-care plan requires federal approval, according to a press release from the state. Kentucky also renewed an annual contract with the nonprofit Passport Health Plan, which will cover one of eight regions within Kentucky, while plans from the three added companies will cover the rest.

WellCare, which has its main business in Florida and Georgia, has seen its membership rebound lately, partly driven by growth in Medicare prescription drug programs. The Tampa-based company said it isn't updating its 2011 financial guidance, and will address its full-year outlook when it reports second-quarter results in early August.

St. Louis-based Centene, which said the Kentucky award marks the company's entry into its 13th state, will update its financial guidance to include Kentucky when it reports later this month. Michael F. Neidorff, Centene's chairman and chief executive, said the company will preserve its "normal margins for a new business."

Coventry, based in Bethesda, Md., said it will provide further financial details after the commencement of the contracts. It also said it has already started building infrastructure necessary to enroll beneficiaries in Kentucky.

The state estimated the new contracts will create 543 jobs by Jan. 1--the insurers are required to have local offices--while balancing the state's Medicaid budget for the current fiscal year. The state also estimated that the contracts will save tax payers $375 million in general funds and $1.3 billion in all funds over the three-year term.

Susquehanna Financial analyst Chris Rigg estimated the contract wins will add roughly $700 million in sales for each company, but he estimated a "modest earnings headwind" into early 2012 due to start-up expenses. He isn't changing earnings estimates until he has greater clarity on those expenses and exact contract timing.

-By Jon Kamp, Dow Jones Newswires; 617-654-6728; jon.kamp@dowjones.com

--Drew FitzGerald contributed to this article.

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