Centene employees and customers' recent complaints against the $32.5 billion insurer highlight the challenges large companies face as they grow through acquisition.
During the past month, the insurer has been hit with four proposed class-action lawsuits on behalf of its workers, three of which allege administrative and technology failures led the insurer to shortchange employees on pay. Another suit alleges mismanagement of the company's retirement benefit plans led the portfolios to underperform.
Also, providers in Florida and California have called out the company's Wellcare and Magellan Health subsidiaries, saying technology issues and worker shortages led to payment and prior authorization delays.
While Centene is certainly not the only insurer facing pushback from workers and clients, the number of complaints against it since the start of the year raises eyebrows, said Gary Taylor, managing director and senior equity research analyst at Cowen and Company consultancy. The criticism likely stems from Centene's multiple acquisitions in the past few years. And the recent arrival of activist investor Politan Capital Management is exacerbating the issues and signaling that Centene could be open to acquisition, Taylor said.
Centene did not respond to interview requests.
"You can understand some underlying level of worker angst for a company that's actively acquisitive," Taylor said. "But to the point about the class-action lawsuits from employees, that's pretty pretty rare."
Bolt-on growth
Centene was founded by a former hospital bookkeeper in 1984 as a not-for-profit Medicaid insurer. CEO Michael Neidorff joined the company in 1995 and has focused on growing it through acquisition. In the past decade, the insurer has grown the fastest among its seven publicly traded rivals as a result of acquisitions, with its EBITDA rising at an average rate of 37% annually, according to a report last year from Moody's Investors Service.
Centene is the largest Medicaid carrier in the nation, with lower-income adults and children making up more than half of its 26.6 million enrollees. The company also is a major player in the Medicare Advantage and Affordable Care Act exchanges business.
"Historically, Michael Neidorff was a builder, an acquirer, and generally was resistant to a sale," Taylor said. "Obviously, the board of directors has the controlling vote on that, but his influence on the board historically has been to continue as a independent public company."
The company's board of directors generally has supported Neidorff's plans, approving big acquisitions in 2018 of Fidelis Care, a not-for-profit Medicare and Medicaid plan the insurer bought for $3.75 billion; Wellcare, an insurer Centene paid $17.3 billion for in 2020; and behavioral health provider Magellan Health, a $2.2 billion acquisition Centene closed in January.
The deals represent growth through horizontal mergers, which can pose heightened integration challenges compared with vertical deals because they can require tougher decisions around overlapping service areas, said Matt Borsch, managing director and senior research analyst at BMO Capital Markets. Centene's aim to integrate Magellan and Wellcare, which were largely built through vertical acquisitions themselves, adds another layer of complexity since these companies could still be working to consolidate overlapping areas of their business, he said.
Fitting all the pieces together during the COVID-19 pandemic, as employees worked remotely, could have added to worker strife and technology challenges, Borsch said.
"There's perhaps been an attempt to hard knuckle on some of the cost controls and things like that, more so at Centene than with other companies, and now what you're seeing in these worker actions is the consequence of that," Borsch said. "It may be that some of these things were happening below the surface, and now in this environment, they broken out into the open."
Workforce shortages likewise have contributed to Centene's operational issues – both by frustrating customers through service delays and empowering employees to take action, he said.
In January, the insurer's recently acquired Magellan subsidiary took over management of California's Medicaid prescription drug program. Worker shortages frustrated thousands of patients waiting for prior authorization approvals, some of whom were on hold with call centers for up to eight hours at a time.
A year after the acquisition, Centene is reportedly thinking of divesting Magellan. The insurer is also working to sell "non-core assets" related to its now defunct-pharmacy benefit manager business after settling with five states last year over allegations the company overcharged Medicaid programs for drugs.
Unlike UnitedHealth Group's and CVS' PBMs that are fighting similar allegations from state Medicaid programs in court, Centene chose to settle with states and reserved $1.25 billion for the settlements since its business is less diversified and highly dependent on state contracts, said Nathan Ray, a partner at the healthcare and life sciences division of consultancy West Monroe Partners.
"They're operating in what is probably their business' best interest, which is to not fight something that ultimately has a root in something they're going to have to pay anyway," Ray said. "Their plan is to hopefully settle for a percent of likely liability versus the entire enchilada."
Providers and patients also have called out the company's integration of Wellcare. A computer glitch related to the integration led Centene to delay payment to Medicaid providers in Florida for three months. Wellcare and Centene employees also allege that promises of extra pay for working overtime during Medicare open enrollment never materialized.
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"When it rains it pours," Ray said. "In the last couple years they've taken on some fairly sizable acquisitions and they operate a fairly complex set of managed care products in a number of different states. My overall feeling is they're just probably not appropriately resourcing to the scale of some of the acquisitions and not planning or overlooking a situation where they were making decisions that exposed their employees."
While Centene's buying spree has led to the largest EBITDA increase among rivals, its focus on government-sponsored care translates to lower profit margins compared with competitors that focus primarily on selling health plans to employers, BMO Capital Market's Borsch said. States' implementation of Medicaid risk-sharing corridors meant the company did not experience the financial windfall some of its competitors did because of consumers delaying some medical care during the pandemic. Centene expected to pay more than half a billion in risk-sharing corridor settlements in 2021.
In November, the company's comparatively low profit margins attracted the attention of activist investor Politan Capital Management, which grabbed a $900 million stake in the insurer with the goal of increasing Centene's value by selling certain subsidiaries lines and overhauling the company leadership and board.
Politan did not respond to an interview request.
Since then, five independent board members approved by Politan have joined the company and six longtime board members have retired or announced plans to step down. After a quarter century of running the insurer, Neidorff announced plans to retire as chairman and CEO at the end of 2022. The company is hoping to hire Neidorff's replacement by the end of its second quarter.
The strain of finding a new leader may have created additional stress for employees, along with rumors that the company itself could be acquired.
Sightings of Humana's jet flying over the insurer's St. Louis headquarters last year sparked whispers that Centene was up for sale. At the end of the year, speculation surfaced that Cigna was interested in acquiring the insurer, although Cigna has since said it does not plan to make any large-scale acquisitions this year.
Centene is likely more open to overtures than in the past, Taylor said.
"If you really were looking to sell the company or entertaining offers, the last thing you would want to have to deal with is an employee class-action lawsuit," Taylor said. "So from that perspective, you could say if you're an employee and you want to exert maximum leverage over the company, that now would sort of be an ideal time to do it."
