Why Medicaid and ACA kingpin Centene wants to buy rival WellCare

Centene Corp.’s pursuit of WellCare Health Plans would cement the company’s position atop the Medicaid managed-care market. But the heart of the deal—and the real benefit to Centene—is the addition of Tampa, Fla.-based WellCare’s hundreds of thousands of Medicare Advantage members. Adding them to the portfolio would propel Centene into the fastest-growing segment of the industry, which shows no signs of slowing as baby boomers rapidly age into the program.

St. Louis-based Centene announced its proposed $17.3 billion takeover of WellCare March 27.

With nearly every health insurer throwing elbows to capture a piece of the lucrative but crowded Medicare Advantage pie, Centene needs WellCare’s help in establishing itself in the space. Going it alone would be a heavy lift. 

“To grow (Medicare Advantage membership) organically, they’d be starting from a standstill,” said David Windley, managing director at investment firm Jefferies. “Stapling on a WellCare group that has critical mass in Medicare Advantage in markets where Centene doesn’t gives them a more legitimate platform to grow from.”

Until now, Centene’s forays into Medicare have been limited, though CEO Michael Neidorff told investors in June last year that Medicare Advantage was a renewed area of focus for the insurer. It bought insurance company Health Net in 2016, expanding its Medicare membership in California, and most recently announced it would launch an Advantage plan with national health system Ascension. 

WellCare, meanwhile, boosted its Advantage rolls when it bought Universal American Corp. in 2017. Last year, it also bought Medicaid and Medicare insurer Meridian Plan, and by 2020 will absorb Aetna’s stand-alone Medicare prescription drug plan membership into its already 1 million Part D members.

A combined Centene-WellCare would more than double Centene’s Medicare Advantage membership as of January to almost 900,000, positioning it just below Anthem in terms of Advantage enrollees. That figure doesn’t include stand-alone drug plans or other plans for dually eligible patients.

But that’s only if the deal passes antitrust scrutiny. Other “horizontal” insurer mergers between companies that compete for business have crashed and burned in recent years. The Justice Department successfully blocked a merger between Aetna and Humana and another between Anthem and Cigna, saying the combinations would reduce competition. 

Since then, Aetna paired up with pharmacy behemoth CVS Health and Cigna bought pharmacy benefit manager Express Scripts in what’s called “vertical” consolidation, which seems to be more palatable for antitrust enforcers.

While Centene and WellCare are much smaller than some of the other national insurers that have sought to merge, the deal still isn’t a slam-dunk. Analysts said Centene will have to divest business in a number of states. The insurers compete in eight states, according to Piper Jaffray analyst Sarah James. 

Georgia and Florida could be the most problematic because the companies hold a combined market share of 52% and 48%, respectively, in those markets, SVB Leerink analyst Ana Gupte wrote in a research note.

But for Centene, divestitures may seem a small price to pay for scale and a bigger Advantage footprint. “There is a race to consolidate, and we are nowhere close to the finish line,” said Deep Banerjee, director at S&P Global Ratings.

A Centene and WellCare combination would also lead the rest of the industry in Medicaid beneficiaries with 12.3 million members. Centene already dominates the space with its 8.4 Medicaid members now. 

But with more scale, the insurer will have more negotiating leverage with hospitals and other healthcare providers, especially at a time when other insurers are bulking up and diversifying. 

Centene said the deal would result in $500 million in annual “net cost synergies” by the second year by leveraging scale to manage pharmacy and medical costs and optimizing technology and process management capabilities. 

“There’s a need for scale to control costs and compete more effectively,” Banerjee said.

Centene serves about 2 million Affordable Care Act exchange members in 22 states this year—the most of any insurer. And while Neidorff has long espoused his mantra that it’s “business as usual” in the exchanges regardless of what’s going on politically, the truth is that the ACA marketplace is a risky place to be. Enrollment has largely plateaued, and is shrinking in many states; it’s unclear how much more Centene could grow there. 

The exchanges are also in jeopardy politically. The Justice Department under the Trump administration last week told a federal appeals court that the ACA should be struck down. 

If that happens, more than 20 million people who gained coverage through the exchanges or Medicaid expansion would lose their insurance, and companies like Centene would lose a big source of revenue.