As the industry keeps changing, it's important to know a company's "pedigree."
WellPoint Inc.'s acquisition of fellow health insurer Amerigroup will help the company's business in a Medicaid market primed for growth, but it still faces challenges from the health care overhaul's upcoming coverage expansions, according to a Goldman Sachs analyst.
Analyst Matthew Borsch said in a research note he restored a "neutral" rating to WellPoint shares after removing his rating when the insurer said in July it would buy Amerigroup in a $4.46 billion deal. WellPoint completed that deal last month.
Borsch said he sees the acquisition as a positive for WellPoint, in part because Amerigroup is a Medicaid coverage provider that excels at winning new business and has a strong geographic reach.
Medicaid is the state and federally funded program that provides medical coverage for the needy and disabled people. Analysts see growth potential in Medicaid partially because more people will become eligible for the program starting next year due to the overhaul.
More states also are asking insurers to convert their Medicaid populations to managed care programs that coordinate and improve care while cutting wasteful spending. This is especially true with patients who are eligible for both Medicaid and the federally funded Medicare program.
Borsch noted that WellPoint now has about 4.5 million Medicaid lives in 19 states, the top market share in the sector.
But he also noted that the insurer generates a third of its earnings from commercial insurance sold on the individual market or to employees of small businesses.
Insurers in those markets will have to adjust to new methods for pricing coverage due to overhaul. They also face the prospect of losing some of that business once their customers start shopping for policies on state-run health insurance exchanges that will begin next year.
WellPoint shares closed at $62.44 on Monday.