Healthcare in America has long been a balancing act between accessibility, affordability, and sustainability.

Medicaid and Medicare, the two largest government-sponsored programs, are central to this system and offer vital lifelines to millions of Americans.

Medicaid primarily supports low-income individuals, while Medicare focuses on the elderly and disabled.

Despite their importance, these programs face ongoing challenges that affect both patients and providers.

Reimbursement rates, which dictate how much doctors and hospitals are paid for their services, vary widely depending on state policies.

For example, some states offer Medicaid rates close to Medicare’s, while others reimburse at a fraction of Medicare’s levels.

This discrepancy impacts whether providers accept Medicaid patients, directly influencing access to care.

States with lower reimbursement rates often see fewer physicians willing to participate in Medicaid, leaving patients with limited options despite having insurance.

For healthcare providers, these gaps in reimbursement create financial strain, especially for practices in rural and underserved areas.

Take Molina Healthcare (MOH) as an example.

Molina’s revenue is closely tied to Medicare and Medicaid, programs heavily influenced by government decisions.

With potential policy changes under the Trump administration, there’s fear that fewer people will qualify for these programs, which could reduce the company’s earnings.

This caused the company’s stock to drop 17% after peers like Elevance Health (ELV) and UnitedHealth (UNH) reported worse-than-expected medical cost ratios (MCRs).

A broader look at Medicare policy highlights the challenges. Medicare has faced systemic issues for years, including annual payment cuts to physicians.

Since 2021, doctors have seen their reimbursements reduced repeatedly, with another 2.8% cut proposed for 2025. Adjusted for inflation, Medicare payments to physicians have dropped 29% since 2001.

This creates a strain on healthcare providers, especially in underserved areas, and indirectly affects companies like Molina that rely on these networks.

One of the main drivers of these cuts is Medicare’s budget-neutrality rules. While intended to keep spending in check, these rules often result in large payment redistributions that hurt providers.

For Molina, these policies add another layer of risk, as lower payments to doctors and healthcare providers can disrupt access to care for its members.

At the same time, the healthcare system is moving toward value-based care, where providers are rewarded for quality rather than volume.

While this shift is positive in the long term, it brings new challenges. Providers need better data and infrastructure to meet these goals, which can create costs and uncertainties for companies like Molina as they adapt to these changes.

All of these factors combined made the market very concerned about Molina.

We can see this through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

Despite Molina consistently delivering a strong Uniform return on assets ”ROA”, averaging 20% since 2018, the market is pricing the company as if its future ROA will drop to 15%.