Why Molina Healthcare Shares Got Crushed

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Molina Healthcare (NYS: MOH) plummeted 30% on Thursday after the health insurer pulled its 2012 profit outlook due to medical cost uncertainties in Texas.

So what: Molina has been expanding rapidly its Texas, but higher-than-expected member claims from Hidalgo and El Paso are triggering serious concerns about its profitability going forward. Naturally, the fears are carrying over to other health insurers with exposure to those markets, as the likes of Centene (NYS: CNC) and Amerigroup are down 13% and 4%, respectively.

Now what: To rectify the situation, Molina plans to set new premium rates on September 1 and control costs as best as it can, as well as asking the state of Texas for some relief in its rate-setting assumptions. Of course, if management can't turn things around in Hidalgo and El Paso, Molina can simply choose to leave those margin-squeezing markets. So while the Texas trouble will certainly put pressure on Molina in the short-term, it's likely not as devastating to the long-term bull case as today's sell-off suggests.

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At the time thisarticle was published Fool contributor Brian Pacampara owns no position in any of the companies mentioned. Try any of our Foolish newsletter services free for 30 days.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy always gets a perfect score.

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