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The Centene-WellCare Deal Is a Bet on Obamacare

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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 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.

(Related: Centene to Pay $15 Billion to Join the Medicare Gorilla Table)

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.

Of course, all of that relies on the notion that there will be only limited changes to current health policy. That could be the right call. President Trump’s ACA challenge is unlikely to succeed, and a divided Congress won’t come to broad health care consensus. A Medicare-for-All plan, if it happens at all, is years away, and some Democrats are in favor of incremental plans that retain a role for private insurers.

Centene is probably thinking back to the effort to pass the ACA. In the D.C. pressure-cooker, the legislation transformed from a plan that would force insurers to compete with a government-run public option to a more industry-friendly initiative that brought these two companies out of obscurity.

The deal could go wrong. The new business would have a hefty debt burden, which could leave it more exposed to government encroachment. There’s support for a push for universal coverage, and any such effort will require a more active government role in insurance markets. But until any changes actually happen, the combined firm will be in a better position to compete against large and increasingly diversified rivals. It will be less dependent on any one program or region, which should offer some protection.

At the end of the day, betting against Washington’s ability to fully follow through on big health care promises has usually been the right call.

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Max Nisen

Max Nisen is a Bloomberg Opinion columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

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