Here is the letter health care providers will be getting soon from Centene. (Click to see full size.)

(Editor’s note: This post was updated at 4:30 p.m. The original version identified the wrong city as Centene’s Kentucky headquarters.)

It looks like St.Louis-based Centene Corp. is serious about ending its Medicaid managed care contract next year with Kentucky’s Cabinet for Health and Family Resources.

Serious enough Centene’s Kentucky VP of Network Development and Contracting has composed a letter to physicians and health care providers explaining its position in the showdown with state officials, and why it’s leaving. (A source says those providers likely will receive the letter in the next few days.)

In the letter, Thomas Storck lays out what the insurer believes to be its major contributions and innovations in Kentucky’s switch to a managed care system from a fee from serves, a transition that began in April, 2011.

Then he adds:

Unfortunately, throughout this period we have also experienced numerous issues with the Cabinet on the implementation of this new Medicaid Managed Care program. Based on our experience through the first eleven months of the program, it is clear that the Cabinet provided incomplete and erroneous information related to medical cost experience and non-standard program policies during the RFP process. As a result, all three MCO’s have incurred medical costs well in excess of our revenue from the State – this is clearly not the basis for a successful or sustainable Medicaid program.

Ouch. Especially the part about all three MCOs bleeding money, which hints that Kentucky could end up with no one in charge of Medicaid disbursement.

The Courier-Journal is reporting Kentucky officials are shocked, shocked that Centene would have the chutzpah to pull such a stunt. But our sources are telling us the exit of low-bidder Centene would completely drain all the projected savings from the Beshear administration’s much touted switch to managed care from a fee-for-services system, which was supposed to save the state almost $400 million. Centene bid $330 per member, per month, according to confidential internal state documents submitted to Insider Louisville. WellCare’s bid was based on $400 per member per month, and Coventry bid $436 per member per month.

Kentucky instituted the switch to managed in a matter of months, a process that took years in other states such as Georgia.

As we’ve reported all along, each insurer posted a $25 million performance bond as part of the contract process back in July, 2011. But if Centene really is bleeding money like its executives claim, surrendering the $25 million is by far the least painful way out of the deal before the July 2013 expiration.

Centene’s exit means the three remaining MCOs – Coventry, WellCare and Passport hold the contracts now – may all have to pick Centene’s 140,000 Medicaid members, as well as its 200 employees, most of whom work in Lexington.

The back story on Medicaid changes in Kentucky: In April, 2011, state officials asked health insurers to submit managed-care proposals for the $6 billion worth of care 800,000 poor and elderly Kentuckians receive annually under the federal/state Medicaid program. At the time, Gov. Steve Beshear touted the switch to managed care from fee-for-services as saving the state $375 million over the life of the initial three-year contracts. Insiders said officials in other states such as Georgia took as long as 18 months to make the change while Kentucky tried to do it in less than six months.

The three companies receiving MCO contracts were St. Louis-based Centene, Tampa, Fla.-based WellCare and Coventry Cares, based in Bethesda, Md. All are publicly traded companies. (Passport Health Plan, a Louisville-based non-profit controlled by providers, is the managed care insurer for Jefferson County and 16 surrounding counties.)

Each bid for the Kentucky MCO business was based on per-member, per-month health care costs projections. Low-bidder Centene bid $330 per member, per month, according to documents submitted to Insider Louisville. WellCare’s bid was based on $400 per member per month, and Coventry bid $436 per member per month.

The algorithm state officials used to choose the winners favored the low-cost plans, obviously, because therein lies the savings.

The state methodology initially assigned members to a plan, with the two lowest cost plans getting more members than the highest.

If Centene’s manged care system, for example, could actually get each member to spend less than $330 per month, they’d make a profit. But crucial to getting costs that low would mean lowering reimbursements to health care providers such as doctors and pharmacies, which meant losing some.