In general, I think the S&P 500 looks heavily concentrated and expensive – not qualities I look for in an investment. But within the index I’ve found a stock to add to my portfolio.

I suspect a lot of UK investors are unlikely to have heard of Molina Healthcare (NYSE:MOH). I’ve been taking a closer look though, and I like the look of what I’m seeing… very much. 

Medicaid

Medicaid is the US government’s healthcare provision for – primarily – low income individuals. It’s administered by individual states via a series of private companies that make the care happen.

Molina Healthcare’s one of these providers. The basic idea is that it gets money from a state and uses this to connect patients to doctors, hospitals, or whatever else they need in terms of healthcare.

Around 80% of Molina’s revenues come from Medicaid and that makes it vulnerable to changes in government policy. And such changes are why the stock’s down 36% in the last 12 months. That’s the risk – and there’s not much the company can do about it.

But I think the business has some unique advantages that make the falling share price a potential buying opportunity. 

Costs

Medicaid providers can’t increase the amount they charge individual states so the amount they get is fixed. What they can do however, is keep their own costs low – and Molina excels in this area.

Providers are required to spend at least 85% of what they receive on care. That means their profitability comes down to how they use the remaining 15% to cover their operating expenses. This is where Molina separates itself from other providers. Its cost ratios are typically lower than the likes of Centene, Elevance Health, or UnitedHealth Group and this is a huge advantage.

Lower costs mean the firm can keep making money while others are barely breaking even – 2025 being a good example. And this is why the stock jumps out at me from a buying perspective.

Molina’s advantage

The obvious question is why Molina’s able to keep its costs lower than competitors – and why the likes of UnitedHealth can’t do something similar. There are several reasons.

One is the company’s focus on government-funded programmes. This means it avoids the costs that other businesses incur in marketing to employers that provide healthcare for employees.

A bigger reason though, is focus. This shows up in both the firm’s IT systems (where it uses a single platform) and in its physical presence (where it avoids separate offices in individual states). 

This means Molina has much lower staffing requirements. And this translates into a cost structure that rivals can’t match without spending billions on a digital transformation and reducing staff.

Investment thesis

Having lower costs than the competition is one of the most important advantages a business can have. And when that’s a long-term strength, I get the interested in the stock as a potential investment.

I think this is the case with Molina Healthcare. That’s why I’ve been seeing the ongoing challenges in the US healthcare sector as an opportunity to start buying the stock for my portfolio.