WellCare Purchase Positions Centene for More MA Growth

Provident’s Kevin Palamara was quoted in a recent article from Radar on Medicare Advantage.

WellCare Purchase Positions Centene for More MA Growth

Reprinted with AIS Health permission from the April 4, 2019, issue of RADAR on Medicare Advantage

In what seems like a logical next step for the two government-focused insurers, Centene Corp. on March 27 unveiled plans to purchase WellCare Health Plans, Inc. for approximately $17.3 billion. The combination would create a “premier health care enterprise focused on government-sponsored programs,” according to the companies, and would likely accelerate Centene’s long-term goal of expanding its Medicare Advantage presence.

With 7.7 million Medicaid members in 21 states, Medicaid makes up more than half of Centene’s overall membership, according to AIS’s Directory of Health Plans. Centene is the country’s largest managed Medicaid insurer and the biggest player on the Affordable Care Act (ACA) exchanges, serving nearly 2 million exchange lives across 20 states.

MA Is Small Piece of Centene’s Business

But with just under 417,000 lives as of Dec. 31, 2018, the company’s MA business is relatively small and focuses mostly on low-income and dual-eligible beneficiaries. Speaking at Oppenheimer’s 29th Annual Healthcare Conference in New York City, Centene Senior Vice President of Finance and Investor Relations Ed Kroll last month told investors that the company’s plan is to increase its MA segment “over the long haul” with a continued focus on low-income individuals and on the markets in which it already has a presence. UnitedHealth Group subsidiary UnitedHealthcare, by contrast, served more than 5.7 million MA lives as of February 2019.

Since the 2016 acquisition of Health Net — which significantly boosted its Medicaid and Medicare membership — Centene has been making incremental moves to grow MA, from gradual expansions into its Medicaid states to the July 2018 acquisition of Fidelis Care in New York, which added about 65,000 MA lives and moved Centene into one of the largest managed Medicaid markets. And Centene last year formed a joint venture with not-for-profit health system Ascension that involves launching new MA products in 2020.

“They’re certainly not the scale of a Humana or UnitedHealthcare at this point, but I think the plan here is to build scale and to build a multifaceted business model, and I think a lot of that gets accomplished in this transaction as these groups have very complementary business lines and are obviously going to build a lot of scale through a combination,” observes Kevin Palamara, managing director with Provident Healthcare Partners, LLC, in Boston.

“I think there’s going to be some benefits here for both groups moving into some new states with new products. And I think there are states where WellCare provides an entree point into the pure MA plan, where it may not be the dominant player or even a significant player but does have some MA presence, like Louisiana, where Centene is a very strong player in Medicaid,” says Palamara, whose firm brokered UnitedHealthcare’s 2018 buy of Louisiana MA plan People’s Health.

Centene Can Leverage Added Technology

“With their combination, Centene gets some additional technology infrastructure that they can leverage to manage the population but also use as a way to potentially offer new services and the like that could attract new members to their plans,” weighs in Jon Brown, an analyst with Provident.

WellCare as of February 2019 served 537,000 MA members, many of whom are in dual eligible Special Needs Plans. The company also has 1.1 million stand-alone Prescription Drug Plan members and on Jan. 1, 2020, will gain 2.2 million PDP enrollees from Aetna Inc. Managed Medicaid is the biggest component of its business, and with 3.9 million enrollees in 12 states, WellCare is the fourth-largest Medicaid MCO. The 2018 acquisition of Meridian Health Plan grew WellCare’s Medicaid membership by 40%, expanded its geographic footprint from 18 to 21 states and added about 27,000 MA lives. The companies estimated that the combined entity will serve 12.3 million Medicaid members and 4.8 million Medicare members (which includes MA, Medicare Supplement and PDP lives), creating the fourth largest Medicare player in the industry.

Companies Share Local Approach

During a March 27 conference call to discuss the transaction, executives highlighted the companies’ shared focus on serving the government sector through a community-based approach and their history of successfully integrated acquisitions as keys to a compelling combination. Moreover, they estimated that the transaction would generate approximately $500 million in annual net cost synergies by the second year, in part due to general and administrative expense efficiencies and improved economies of scale in medical cost management and pharmacy. Over the longer term, the companies expect to drive additional synergies through expanded product offerings, leveraging WellCare’s Medicare capabilities across markets and optimizing information technology systems and process management, said Centene Chief Financial Officer Jeffrey Schwaneke during the call.

While waiting for the transaction to close — which is expected to happen in the second half of 2020 — Centene Chairman and CEO Neidorff said the companies would independently pursue their respective MA growth plans. “Whatever happens we’ll continue down our independent paths…while planning for how to put it together as quickly as we have the appropriate regulatory approvals,” he said in response to a question from Scott Fidel with Stephens Inc. “Once we have that approval, we will have determined how we’re going to put together and drive significant growth in Medicare that meets our stated objectives and WellCare’s. I think it should be valuable in the Medicare area.”

In a March 27 research note, Oppenheimer securities analyst Michael Wiederhorn said the firm believes “the deal is the right strategy, giving Centene significant diversification and a much larger Medicare presence at a reasonable price.” He wrote that the $500 million synergies estimate is “conservative” and that MA “remains attractive due to the lack of managed-care penetration in the lower income market.”

Firms Are Confident in Approvals

Despite some potential geographic overlap, Centene executives during the call expressed confidence in the regulatory process and noted that the $500 million in estimated synergies is net of potential divestitures.

“Both teams have very solid advisors, a lot of experience dealing with [Hart-Scott-Rodino requirements] and various states, and when you’re looking at Medicaid particularly, there [are] not the same issues from a competitive standpoint,” Neidorff said in response to a question from Bank of America’s Kevin Fischbeck, who estimated that four of eight overlap states would give them more than a 50% share of the Medicaid market. “So while there is some overlap…we believe it’s all very manageable and now that this is announced, we will start yet today working with the states, dealing with the issues [and] moving through what we believe will be a successful process.”

Centene would remain headquartered in St. Louis and Neidorff would continue to serve as chairman and CEO of the combined entity. WellCare CEO Kenneth Burdick and Chief Financial Officer Drew Asher would join the senior leadership team in newly created positions. Moreover, the board would consist of 11 members, nine from Centene and two from WellCare.

Visit https://investors.centene.com. Contact Brown or Palamara via Gina Casiello at gcasiello@providenthp.com and Wiederhorn at michael.wiederhorn@opco.com.

by Lauren Flynn Kelly

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