David Nicklaus: Centene deal is a bet on growth and on health care policy

March 31-- Mar. 31--You don't have to tell Centene Chief Executive Michael Neidorff that the future of American health care is uncertain.

Centene announced its $17 billion acquisition of WellCare Health Plans a day after the Justice Department asked an appeals court to strike down the entire Affordable Care Act. The government's stance poses a threat to both the "Obamacare" exchanges, where Centene is the largest provider, and to the expansion of Medicaid, a core business for both Centene and WellCare.

"I wake up every morning scared," Neidorff said in an interview Friday about the deal. "The moment you get complacent, it's going to hurt you."

He said he expects the courts to uphold the ACA. A Texas judge ruled in December that the act is unconstitutional, but if the case gets to the Supreme Court, Neidorff believes at least six of nine justices would vote to overturn that ruling.

Centene can't afford to put its business on hold while the legal drama plays out. "You make decisions based on the facts as they are today," Neidorff said. "It (the ACA) is in place today, and I have to plan on it being here."

Some analysts have noted that buying WellCare diversifies Centene away from the controversial exchanges, but Neidorff says that didn't enter into his thinking. "There's nothing defensive about this deal," he declared.

What he liked was WellCare's strong Medicare Advantage plan, and the scale the acquisition gives Centene.

Centene is forecasting $70 billion in revenue this year. With WellCare, it will be close to $100 billion. Size gives the company a louder voice in Washington policy debates, but it also lets Centene invest in technology that can drive down costs and improve care.

The stock market knocked Centene shares down 5 percent after Wednesday's announcement, although they gained back some ground Thursday and Friday.

That was partly a response to the price Centene paid, and to Centene's admission that the deal may dilute earnings for a year before adding to profits.

"Deals in this space have typically been accretive right away, so to have first-year dilution is not as good," said David Windley, an analyst at Jefferies. "It's strategically a very logical deal but financially more challenging just because of the valuation."

Chris Meekins, a health care analyst at Raymond James, sees another reason for the investor reaction. "There was a decision that had to be made by Centene leadership whether they were going to be a buyer or a seller," he said. "Some folks owning Centene may have been in the stock because they thought the company would be sold, and that's not likely now."

The company has been a serial acquirer, buying California-based HealthNet in 2016 and New York's Fidelis Care last year, and Neidorff hints that the buying may not be over. When the deal closes in the first half of next year, Centene's debt will be about 40 percent of total capital, and it plans to reduce that to around 35 percent within a year.

Centene's growth has been good for the St. Louis area, which is home to about 4,700 of the company's 47,300 employees.

It's also been good for investors, whose shares have risen more than 40-fold since they went public in 2001.

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