With Wellcare deal, future looks bright for Medicare Advantage plans

Experts believe the Medicare Advantage market, already growing at a feverish pace, will expand further under President-elect Donald Trump and the Republican-controlled Congress, who have embraced the private HMO version of traditional Medicare.

Last week WellCare Health Plans placed an $800 million bet on that prediction.

WellCare plans to acquire Universal American Corp., bolstering the company's investment in Medicare Advantage and accountable care organizations.

WellCare will pay $10 per share in the all-cash deal for Universal American, equating to about $620 million based on the company's latest number of outstanding shares. After factoring in Universal American's debt and retirement of preferred shares, the deal is worth about $800 million.

Medicare Advantage represents about 27% of WellCare's revenue, and adding a pure Medicare company like Universal American will immediately give the insurer a bigger footprint.

Ana Gupte, an analyst at investment bank Leerink Partners, called WellCare's deal in a Nov. 16 note “a strategically and financially sound acquisition for the company, especially after the GOP sweep in the election.”

Financial analysts viewed Universal American as a possible target for WellCare earlier this year, after WellCare executives said they were actively looking to acquire other plans and wanted to improve their Medicare business. This deal would be WellCare's third this year. The Tampa, Fla.-based managed-care company most recently agreed to buy Care1st Health Plan of Arizona, marking WellCare's entrance into Arizona's privatized Medicaid program.

Buying Universal American also drastically improves the quality of WellCare's Medicare plans, which ultimately means more money. Medicare Advantage plans that have four stars or more earn bonuses from the federal government. Roughly 70% of Universal American's 114,000 Medicare Advantage members are in plans with at least four stars.

WellCare doesn't have any four-star Medicare Advantage plans. Its highest-quality plan has three stars overall, putting it among Medicare's lowest performers, according to the latest data from the CMS.

“Improving our star ratings is a multiyear, companywide effort, and it's a top priority for me and the entire organization,” WellCare CEO Ken Burdick told investors earlier this month. “We are attacking this initiative with the same energy, discipline and commitment that we brought to bear on our multiyear margin expansion strategy.”

Gary Taylor, an analyst at J.P. Morgan Securities, believes WellCare can “crosswalk” some members in its lower-performing Medicare Advantage contracts to the

higher-rated Universal American ones, which would “bring increased quality bonus revenue” from the taxpayer-funded program, he said in a research note after the deal was announced.

Universal American shifted its business strategy last year by selling off its Medicare supplemental insurance and long-term-care insurance assets, which it viewed as outside of its core strengths of Medicare Advantage and Medicare ACOs. Although Universal American struggled with its ACOs during these initial rollout years, the insurer has voiced its appetite for more risk-bearing Medicare payment models.

Earlier this year, Universal American was named one of Medicare's 18 Next Generation ACOs, one of the more aggressive payment models that is based on rewarding groups of hospitals and doctors for low-cost, high-quality care.

“This was like getting into Harvard,” Universal American CEO Richard Barasch told Modern Healthcare in January. Both Barasch and Burdick of WellCare sit on the board of directors at America's Health Insurance Plans, the industry's primary lobbying group.

WellCare expects the transaction, which is expected to close in the second quarter of 2017, will save between $25 million and $30 million per year by 2019.