Centene plans to buy WellCare for more than $15B in cash, stock

Health insurer Centene Corp. has agreed to buy managed-care provider WellCare Health Plans Inc. for more than $15 billion, expanding in the market for government insurance plans just as politicians in Washington, D.C., appear to be gearing up for another health-policy clash.

Centene, based in St. Louis, offered $305.39 per share in cash and stock for Tampa, Florida-based WellCare, the companies said in a statement Wednesday. The boards of both companies backed the transaction, which has an enterprise value of $17.3 billion. Deal talks between Centene and WellCare were first reported by Bloomberg on Tuesday.

Both insurers have erected significant businesses around government health programs. Centene is focused on Medicaid and Affordable Care Act markets. WellCare also offers Medicaid and Obamacare coverage and has a large Medicare business catering to the elderly. A combined insurer would have 22 million members in government-sponsored health programs across 50 states, the companies said.

Centene CEO Michael Neidorff’s ambitions don’t end there.

“You don’t achieve a number and say, I don’t need to grow further,” Neidorff said on a conference call Wednesday. “The more we can add, the more we can grow in this area, the better the recipients are, the better for the investors.”

Such grand goals have presented obstacles for other insurers. In 2017, the courts blocked major merger attempts between Aetna Inc. and Cigna Corp., and Indianapolis-based Anthem Inc. and Humana Inc. Aetna eventually merged with pharmacy chain CVS Health Corp., and Cigna bough drug-benefits manager Express Scripts.

Neidorff said that he expected the deal with WellCare to get through an antitrust review, despite prior deals getting blocked.

“There is not all the same issues, all the same issue from a competitive standpoint,” he said. “While there is some overlap in some of the states, we believe it’s all very manageable.”

Investors, however, are signaling doubts. WellCare’s shares were trading more than $35 below the value of Centene’s offer after the market opened on Wednesday, a sign traders aren’t certain the deal will close. The companies said they plan to complete the deal in the first half of 2020.

WellCare shares were up 9.4 percent, to $253.01 each, Wednesday. Centene shares were down 8.4 percent to $50.24.

Drug spending

The combined company will have about $30 billion in drug spending, making it a major player in the pharmacy-benefit management market. That industry is dominated by Cigna, CVS and UnitedHealth Group Inc.

Centene has said it plans to move its pharmacy-benefit contract away from CVS. WellCare CEO Kenneth Burdick said his company, which also contracts with CVS, would also evaluate other options. “There’ll be some attractive opportunity for us to improve our current position,” Burdick said.

The companies projected about $500 million in savings in the second year after the deal closes. That includes possible divestitures to appease antitrust authorities.

Executives from WellCare are expected to join Centene, though the companies declined to describe the precise roles of they would take in the newly combined management team.

Deals and politics

The first quarter has been the biggest of the past 12 years for health-industry mergers and acquisitions globally, according to data compiled by Bloomberg. Bristol-Myers Squibb Co.’s $89 billion purchase of Celgene Corp., including debt, accounted for much of the $173 billion total for 591 deals announced in the quarter so far.

The Centene-WellCare deal arrives just as President Donald Trump and Democrats in Congress are renewing a long-running feud over the Affordable Care Act. The law survived a 2017 repeal effort by Republicans, but 20 conservative-leaning states sued last year to have it repealed on the grounds that changes in tax law invalidated it. Trump’s Justice Department this week backed that effort, to the ire of Democrats.

On Tuesday, Trump tweeted that Republicans would be the “party of healthcare,” while Democratic leaders vowed to protect the ACA. House Democrats are also preparing to unveil legislation that would target high-cost drugs and protect people with pre-existing conditions.

Analysts weigh in

“Centene can boost its long-term revenue and EPS growth with its $17.3 billion proposed purchase of WellCare, but it likely faces a tough road to get antitrust approval, given overlap in multiple states," Bloomberg analyst Jason McGorman said in a report. "WellCare has been winning more new Medicaid contracts, and would provide greater scale in the high-single-digit growth Medicare market.”

The Affordable Care Act, now nine years old, has led to sweeping changes in the American health-care system that have spawned new businesses and reinvented old ones. Overturning the law entirely would mean undoing key planks including its Medicaid expansion, which has increased access to health coverage for millions of lower-income Americans.

An enlarged Centene could be threatened if higher courts uphold the request by the Republican-leaning states and the Trump administration to wipe out the entire Obamacare law, though legal experts have said that outcome is unlikely. The matter is currently before the Fifth Circuit Court of Appeals.