National health insurer Centene's $2.2 billion acquisition of Magellan Health will eventually create one of the nation's largest behavioral health platforms with 41 million members but will take some time to contribute to the payer's bottom line, analysts say.
On Monday, Centene announced plans to acquire Magellan Health, a Phoenix-based managed-care company that provides a behavioral health platform, pharmacy benefit management and specialty care. In addition to building out its behavioral health services, the purchase also expands Centene's specialty drug management services and adds 2 million pharmacy benefit management members and 16 million medical pharmacy members to its portfolio. By focusing on growing these services, Centene CEO Michael Neidorff said the company aims to lower the cost of care for its more than 25 million public plan and commercial members.
"There is a critical need for a fundamentally better approach to supporting people with complex, chronic conditions through better integration of physical and mental healthcare," Neidorff said in a statement. "This has become even more evident in light of the pandemic which has driven a dramatic rise in behavioral health needs."
Dean Ungar, vice president and senior credit officer at Moody's Investors Service, called the acquisition a good deal for Centene in the long-run since it will give its 1 million medical members access to a larger behavioral healthcare network and the opportunity to sell these services to other health plans and companies. In the short-term, however, he said the deal will impact Centene's credit rating. The acquisition increases Centene's debt to capital ratio to about 40%, which the company aims to reduce to the upper 30s over the next year or so.
"The more that you can treat the mental aspects of a person's overall health, the less they spend on more traditional healthcare things," Ungar said.
In a research note, Jefferies analyst David Windley wrote that the transaction will only benefit Centene's earnings per share after two years and $125 million in cost savings. Investing the $2.2 billion in buying back stock instead would have boosted the company's earnings per share up to 6.5%, he wrote. He also called Magellan a "slower growth" business and expects it will experience a 1.5% decline in 2020 and a 3% increase in 2021. He also noted that the company will risk losing customers because it will no longer be "independent," a selling point that Magellan had made for all of its businesses, particularly the pharmacy benefit manager.
He said he did not expect the deal to require any divestitures.
This isn't the first investment Centene has made in its public plans and pharmacy benefit management business.
Last year, Centene beefed up its Medicare Advantage and Medicaid managed-care offerings through its $17 billion merger with WellCare Health Plans, creating one of the largest providers of government-sponsored health plans with roughly 22 million members. The Magellan acquisition will add another 5.5 million members to this business, Centene said.
Its purchase mirrors a recent wave of consolidation between insurers and pharmacy benefit managers in the health insurance industry.
Large deals include CVS Health Corp.'s $69 billion acquisition of insurer Aetna and Cigna's $67 billion deal to buy PBM Express Scripts. Ungar estimated that the "big three" of CVS, Aetna and Optum control about 75% of the pharmacy benefit management market. He said it was a bit of a stretch to think that Centene will compete with that crowd just yet.
"If somebody's got tennis lessons, could they compete with Roger Federer, Rafael Nadal and Novak Djokovic?" Ungar said. "They probably need a little bit more lessons."
Magellan will operate independently under the Centene umbrella. The acquisition is subject to regulatory approval, and Centene expects it to close in the second quarter of 2021. In a separate announcement, Magellan announced Monday that it closed the sale of its Complete Care business, a managed-care organization serving members in six states, to Molina Healthcare for $820 million.