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Life Health > Long-Term Care Planning

WellCare: A Medicaid play

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(Bloomberg) – For health insurers, big government plan operations make WellCare Health Plans Inc. (NYSE:WCG) an obvious takeover target.

WellCare gets almost all of its revenue from Medicare and Medicaid, which provide medical coverage to the elderly, disabled and poor. Both programs are seeing rising demand as the baby boomer population ages and state governments with tight budgets shift more patients to managed-care companies like WellCare. That makes the Tampa, Fla.-based company an appealing acquisition candidate for insurers that want to tap that growth potential, according to Credit Suisse Group A.G.

Analysts expect revenue at WellCare to climb about 45 percent through 2015, or about twice as much as the median rate for the company’s peers.

The $2.8 billion company has been without a permanent chief executive officer since November, and that makes it more vulnerable to a takeover, said Stifel Financial Corp., which estimated the provider could get as much as a 34 percent premium in a sale.

Alec Cunningham stepped down as WellCare’s CEO in November and the company announced in February that Tom Tran will be leaving his post as chief financial officer. No long-term replacement has been announced for either position. Chairman David Gallitano is serving as interim CEO.

Credit Suisse says Cigna Corp. (NYSE:CI) could be a potential buyer.

Aetna Inc. (NYSE:AET) and Humana Inc. (NYSE:HUM) could also be interested in WellCare, said Jefferies Group L.L.C.

 “They have attractive Medicare and Medicaid assets that would be valuable to several of the larger, more diversified guys,” Chris Rigg, an analyst at Susquehanna International Group L.L.P., said in a phone interview. “These are seen as growing areas, and if you can buy an established footprint, particularly in the Medicaid side, it’s beneficial.”

Jack Maurer, a representative for WellCare, said the company doesn’t comment on speculation when asked whether it would be open to a sale.

WellCare last year got 59 percent of its $9.5 billion in revenue from Medicaid, with almost all of the rest coming from Medicare Advantage plans.

As the first baby boomers — people born between 1946 and 1964 — started turning 65 years old in 2011, enrollment for Medicare has climbed. The program will swell to more than 55 million people by 2016, from about 52 million last year, according to estimates from the Centers for Medicare & Medicaid Services (CMS).

Medicaid, which serves the poor, will add about 8.7 million enrollees this year alone, as some states increase coverage under the Patient Protection and Affordable Care Act (PPACA).

Seeking to cut costs, states are switching from a fee-for- service structure for Medicaid to a managed-care system,  in which patients get most or all of their services from providers like WellCare. Expansion of Medicaid managed care should help WellCare, said Thomas Carroll, a managing director at Stifel.

“It’s basically this big block of premium that’s going to shift toward what’s really a small group of companies,” he said in a phone interview from Baltimore. “There is the revenue opportunity. WellCare would very much be appealing to one of the larger players.”


Cigna, which has said it’s interested in expanding further in Medicare and dual coverage, would be a logical acquirer of WellCare, said Chris Carter, an analyst at Credit Suisse. Cigna added some government plan business in 2012 by buying HealthSpring Inc.

“Cigna, when they’ve talked about acquiring businesses, they’ve talked about not necessarily wanting to buy only Medicaid,” Carter said in a phone interview from New York. “With WellCare, you can get both Medicare and Medicaid.”

Carter estimated that WellCare could get at least $80 a share in a takeover, a 26 percent premium from yesterday’s close. Carroll of Stifel projected a sale price of $80 to $85 a share.

WellCare shares climbed 1.9 percent to $64.81 at 9:34 a.m. New York time today for the biggest gain in the Standard & Poor’s MidCap Health Care Index.


Humana has also been expanding in dual Medicare and Medicaid coverage, teaming up with CareSource to offer policies in Ohio. The partnership could be just a “trial run,” Carroll said.

“In order for Humana to be a bigger participant in duals, as more states create models, it feels to me like they’re going to have to buy somebody,” the analyst said. “That somebody might be WellCare.”

Humana has the financial capacity to do a deal, according to David Windley, an analyst at Jefferies. The company’s debt-to-market capitalization ratio of 0.18 is the second-lowest in the industry, according to data compiled by Bloomberg.

“If they had the right target and wanted to pursue an acquisition, they would have the room to add debt,” Windley said in a phone interview.

Aetna or WellPoint

While Windley said Aetna could also be interested in WellCare, Credit Suisse’s Carter said the company is still digesting its 2013 acquisition of Coventry Health Care Inc., which may make a deal more challenging in the near term.

WellCare jumped as much as 3.5 percent intraday on April 10 amid speculation it could be a target for WellPoint Inc. The stock is down 4.8 percent since then.

A deal with WellPoint may be feasible, though there’s significant overlap between their Medicaid coverage, Susquehanna’s Rigg said. WellPoint acquired Medicaid provider Amerigroup Corp. in 2012, and a deal for WellCare would likely require divestitures to satisfy regulators, he said.

Representatives for Humana, as well as those for Aetna, Cigna and WellPoint declined to comment on speculation.

Not now

While WellCare is an attractive target, potential buyers may be focused on other areas right now, said Sarah James, an analyst at Wedbush Inc. Cigna for example may prefer to develop its Medicare business without adding significant Medicaid exposure, she said.

Even so, with the initial stages of the Patient Protection and Affordable Care Act (PPACA) implementation completed, buyers may feel more comfortable weighing an acquisition, said Carter of Credit Suisse. And without a permanent management team, WellCare may be more exposed to advances, he said.

 “There’s basically no senior management to placate,” Carroll of Stifel said. “It seems like now would be an interesting time.”

–With assistance from Alex Wayne in Washington and Caroline Chen in New York.

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