Even if it passes regulatory muster, Centene’s (CNC) $17.3 billion acquisition of Medicaid competitor WellCare (WCG, Financial) faces some questions. One concern is that the Trump Administration could wipe the Affordable Care Act, or Obamacare, from the books.
Colin Scarola, an analyst at CFRA Research, thinks that’s unlikely to happen, according to a March 28 article in the St. Louis Business Journal.
He thinks the issue will ultimately be decided either by a U.S. court of appeals, or even higher in the Supreme Court. "Further, given that the Supreme Court found a way to uphold the ACA’s provisions in 2012, and that those same five upholding justices are still present on the court, we think it is likely the law’s provisions will be upheld again if the case makes it there,” Scarola said.
If the law is somehow repealed, the acquisition will cushion the blow to Centene, which is the largest provider of plans through the ACA marketplaces. It’s estimated that ACA would make up about 7% of total medical membership for the combined company, a drop from the 10% Centene had at the end of 2018. Centene also offers Medicare Advantage plans in 19 states.
Investors are evidently feeling more comfortable with the deal. Centene shares have been on the upswing, to $56.63, since the acquisition was announced. That’s still well below the company’s 52-week high of nearly $75.50 last August.
If there is any regulatory opposition, is shouldn’t be a deal killer. Centene could just sell certain of its assets in states where there was an overlap. The acquisition is expected to be completed late in 2020. At that time the beefed up Centene would manage government health programs for about 22 million people across 50 states; estimated 2019 pro forma revenue would be near $100 billion.
Cost efficiencies realized by combining the two companies are expected to yield about $500 million in savings in the second year.
Cowen & Co. analysts are a bit less optimistic about the deal. They said the key questions are whether regulators will okay the deal and the potential for a margin squeeze, according to the business journal piece.
Cowen said in a report that cuts in Medicare Advantage payments and a new risk-adjustment standard could impact margins and dim growth prospects. “Generally, Medicaid payments for the ACA expansion population have been generous. However, there is mounting evidence that states are likely to reduce payment levels, potentially pressuring Medicaid margin,” Cowen wrote.
Absent the proposed acquisition, investors had to like the results Centene recorded in the fourth quarter, with both revenue and adjusted earnings per share beating analyst forecasts. On top of that, the company upped its 2019 guidance and announced a 2-for-1 stock split.
The Celgene acquisition could have implications for CVS (CVS) and Humana (HUM), according to a March 28 article in Barron’s. CVS could be in jeopardy of losing its role as pharmacy benefit manager for WellCare if Centene switches that business to its own PBM, RxAdvance. That’s $15 billion to $20 billion in annual drug spending that CVS could see disappear. Meanwhile investors were disappointed that Humana has sat on the sidelines rathr than sought its own Medicaid deal.
Disclosure: The author holds no positions in any of the companies mentioned.
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