July 15--The Supreme Court's recent ruling that upheld the constitutionality of President Barack Obama's health reform law appears to have set off a gold rush.
Managed care companies will be scrambling for a bigger piece of the lucrative Medicaid program, which is expected to grow under the Affordable Care Act.
If the trend holds, shareholders of companies including Clayton-based Centene Corp. -- which manages Medicaid programs in many states -- will reap the benefits of this new government largess.
The market already has begun to shift. Within days of the high court ruling, Indianapolis-based Wellpoint Inc. announced it will purchase Amerigroup Corp. of Virginia Beach, Va., for about $4.5 billion in cash.
The combined entity would create the largest player in the managed care market, in which companies contract with states to provide health care to Medicaid patients.
Wellpoint's acquisition of Amerigroup would displace Minneapolis-based UnitedHealth Group Inc. as the largest provider in terms of enrollment of Medicaid patients. Centene would hold the No. 3 slot.
The Wellpoint acquisition may be the first deal in a wave of consolidations within the industry, Wall Street analysts predict.
Large health insurers such as Aetna Inc., Cigna Corp., and Humana Inc. are likely to take a serious look at acquiring one or more of their managed care rivals in hopes of expanding their market share in this rapidly growing industry.
Centene -- one of the St. Louis area's most successful publicly traded companies -- could become a takeover target, according to analysts.
Investors appeared ready for that possibility. Within hours of the Wellpoint-Amerigroup announcement, Centene's stock price jumped 20 percent.
Michael Wiederhorn, an analyst at Oppenheimer & Co. Inc. in New York, said that Centene is viewed as highly desirable not because it's vulnerable, but because "it's a valuable asset" due to its market share and successful track record.
"The largest health insurers will take a look at Centene," Wiederhorn said, "because they have such a good platform... Centene has a nice footprint across the country. They have a reputation of being well run."
Regardless of whether Centene is acquired, its Medicaid business should continue to expand.
The Medicaid business is "one of the last areas in health care services that is continuing to grow," Wiederhorn said.
Chris Rigg, an analyst at Susquehanna Financial Group in New York, agreed that Centene and its rivals have excellent short-term prospects.
"With or without health reform, there are substantial growth opportunities for managed care in Medicaid," he said. "Companies like Centene will move into states where it strategically makes sense, but most of the growth will incur in existing markets such as Texas, Florida, and Georgia, to name a few. Centene does not have to enter new states to benefit from the Medicaid expansion."
Rigg said that Centene and its rivals already have begun to focus on the "dual eligible" population -- chronically ill patients who qualify for both Medicare and Medicaid.
These patients soak up a lot of health care dollars, raising the opportunity that private contractors can offer more cost-efficient care to these patients -- saving money at both the state and federal levels.
Managed care providers typically save states from 8 to 10 percent of their Medicaid budgets during their first year of providing health care services, according to Rigg.
Starting in 2014, he said, the expansion of Medicaid eventually will increase this market by 25 percent, raising the number of fully enrolled Medicaid patients to about 16 million or 17 million.
Though states are permitted to opt out of the federal government's expansion, this only "complicates the Medicaid expansion but doesn't stop it," Rigg said.
The analysts also agreed that Centene could eventually become a takeover target.
"Over the long term, consolidation is likely. Over the long term, Centene is more likely a target to be acquired," Rigg said. "But over the short term, we think the company will continue to grow, including through small scale M&A (mergers and acquisitions)" of its own.
A Centene executive in Washington said the court ruling would have little impact on the company's operations, but acknowledged that growth of the managed care market for Medicaid is likely to accelerate.
"Our focus remains the same: providing high quality care to our members and helping our state customers achieve budget savings," said Jon Dinesman, Centene's senior vice president for government relations. "States are continuing to look at how best to manage their Medicaid costs and provide high quality care to their constituents."
He said the court ruling gives states the flexibility to expand their Medicaid programs, such as covering those with incomes up to 133 percent above the federal poverty level.
"A generous federal match will undoubtedly create the opportunity for some states to expand (their Medicaid programs)," Dinesman said. "States are continuously looking at Medicaid. We may see some states opt out today, but opt in in the future."
In recent years, Centene has expanded its reach. The company now operates Medicaid programs and related services in 17 states.
Both revenue and profit have steadily climbed, with Centene in 2011 posting revenue of $5.2 billion and profit of $111 million. It expects to surpass $7 billion in revenue in 2012, reaching up to $10 billion in revenue in the next few years.
Asked whether Centene could become a takeover target, Dinesman said: "I couldn't speculate."
Chief executive: Michael Neidorff
Revenue: $5.2 billion (2011)
Net income: $111 million (2011)
Total employees: 5,300
Local employees: About 930
(c)2012 the St. Louis Post-Dispatch
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