Health insurance has been in flux for more than 15 years. Changes to Medicare created a much bigger role for private firms in covering seniors starting in 2006. The Affordable Care Act (ACA) expanded Medicaid to more low-income Americans and widened the individual market in 2012. Now Amazon.com Inc. is sniffing around the sector, megamergers have transformed some of the biggest insurers into even larger health care players, and the industry as a whole faces huge policy threats from both sides of the aisle.
On Wednesday, two days after President Trump’s Justice Department fully backed a legal effort that would strike down the ACA, Centene Inc. pushed back with the announcement of a deal, valued at $17.3 billion, that will see it pay $305.39 a share for Medicare and Medicaid-focused rival WellCare Health Plans Inc.
Doubling down on government-sponsored health care is a risk as Trump renews his crusade to curtail it and Democrats float “Medicare-for-All” plans that could reduce or eliminate the role of these private firms. But there’s no guarantee that the system will actually change in a big way, or anytime soon. As long as the status quo — or some version of it — prevails, the deal could pay off. Centene is acquiring WellCare at a discount to its 2018 peak, even with a 21% premium and a significant stock component. If the worst happens, it may make sense for these companies to face it together. The fact that WellCare was willing to accept $120 a share in cash suggests that it sees defensive benefits.
This deal is a gamble that any policy changes will be closer to Tuesday’s proposal by House Democrats to shore up Obamacare than more disruptive alternatives from Donald Trump on the right or Bernie Sanders on the left. However it shakes out, scale matters a great deal in health insurance for pricing, cost structure, and the ability to bid on big contracts. Both Centene and WellCare know this: They’ve each grown substantially via acquisition, and the former has a particularly strong track record in M&A.
Buying WellCare cements Centene as the largest private Medicaid insurer. It would nearly double the firm’s presence in the growing Medicare Advantage market, which covers over 20 million seniors, and makes it a big provider of drug benefits for seniors. More states are considering or beginning Medicaid expansions, and the combined company would be uniquely positioned to take advantage.