logo
  Join        Login             Stock Quote

Unitedhealth (UNH) May Snap Molina, Wellcare As Medicaid Wave Rides High

 July 10, 2012 12:57 PM
 


(By Mani) The $4.9 billion deal between WellPoint, Inc. (NYSE:WLP) and Amerigroup Corp. (NYSE:AGP) may trigger a wave of consolidation among insurers focusing on medicaid, which could potentially be a strong area of growth in the coming years especially after the latest healthcare reform ruling.

The recent Supreme Court ruling on Obamacare requires individuals not covered by an employer or government-sponsored insurance plans to maintain minimal essential health insurance coverage or pay a penalty unless exempted for religious beliefs or financial hardship.

[Related -E*TRADE Financial Corporation (NASDAQ:ETFC): Insider Buying: This Director Throws Darts.]

The landmark decision is expected add 17 million people to the rolls of the insured and the program will reach about 32 million of the 50 million Americans who are now uninsured.

This massive health insurance coverage expansion is about to playout in the U.S., beginning in earnest in 2014, and is expected to benefit providers uniquely since the coverage expansion will yield fewer uninsured/uncompensated patient encounters, while also spurring higher demand for services.

For WellPoint, the pricey acquisition makes sense, as it gains scale in the Medicaid business at a time when the longer term growth prospects look robust. Meanwhile, Amerigroup's dual product offering will be even more attractive now that it is linked to WellPoint's growing Medicare Advantage business and the well-known Blues brand. Dual eligibles refers those elderly being eligible for both Medicaid and Medicare, providing insurers with another huge market.

[Related -Is This The Start Of A Correction?]

WellPoint expects to recognize $50 million in synergies in 2013 and $125 million synergies in 2015. These savings will come from higher investment income, administrative efficiencies and ultimately pharmacy benefit manager (PBM) savings, when Amerigroup's current PBM contract runs out.

"We believe this was an attractive price-tag for Amerigroup, considering the potential growth trajectory for the platform. The compelling growth will come from the dual eligible roll-out, the traditional Medicaid outsourcing and health reform's Medicaid expansion," Oppenheimer analyst Michael Wiederhorn wrote in a note to clients.

The combined entity would have presence in 13 states with significant dual eligible opportunities, including a leading presence in the four largest states (New York, Texas, California and Florida). The near-term dual potential represents a $16 billion revenue opportunity.

The deal doubles WellPoint's medicaid membership, overtaking UnitedHealth Group, Inc. (NYSE:UNH) as the leading Medicaid managed care provider with over 4.5 million members and over $12 billion in pro-forma revenue in 2012.

In addition, the deal diversifies Medicaid footprint to 19 states, 17 of which would be fully insured and two with administrative services. Across all 19 combined states, government spending on duals programs exceeds $180 billion.

As a result, there couldn't be a better time for consolidation in the medicaid industry as the economic, demographic, and budgetary issues are all driving states to increasingly employ Medicaid managed care services as a more cost-effective alternative for their Medicaid programs. The procurement pipeline has been estimated at roughly $50 billion from 2012 to 2014.

Now that the Supreme Court has upheld the healthcare law, states can proceed with expanding their Medicaid rolls to 133 percent of the Federal Poverty Level (FPL), providing a significant growth opportunity for Medicaid managed care names.

The Medicaid managed care names are best positioned to capitalize on state-level pilot programs that will enroll about 2 million dual eligibles into managed care programs. Medicaid spending on managed care programs is expected to increase by nearly $100 billion by the end of 2014.

WellPoint expects enrollment to expand by 15 million people beginning in 2014, over 50 percent of which will occur in the companies' 19 combined states, and that 29 percent of the population in WellPoint's 14 Blue markets will be eligible for Medicaid in 2014.

Since WellPoint is set to grab a larger share of dual eligible enrollments, rival UnitedHealth should act fast before it is too late. Minnesota-based UnitedHealth may target smaller insurers such as Molina Healthcare Inc. (NYSE:MOH), WellCare Health Plans, Inc. (NYSE:WCG), and Centene Corp. (NYSE:CNC) to benefit from this Medicaid trend.

Shares of these companies surged yesterday after the announcement of the deal on anticipation that they could become potential takeover targets. Both Molina and WellCare shares rose 18 percent, while Centene soared 20 percent. The mere fact that WellPoint is paying a 43 percent premium for Amerigroup makes the sector red-hot for takeovers and suggests there is severe competition among the players.

Based on 2013 consensus estimates, Molina trades 15 times to its earnings, WellCare trades at 9.5 times and Centene trades at 11.1 times. On a price to earnings to growth basis, Molina is worth 1.41, compared to WellCare's 0.62 and Centene's 1.21.

Consequently, investors should expect more activity in the sector in the coming months, especially on the M&A front.

iOnTheMarket Premium
Advertisement

Advertisement


Post Comment -- Login is required to post message
Name:  
Alert for new comments:
Your email:
Your Website:
Title:
Comments:
 

rss feed

Latest Stories

article imageChart Says This Retailer's Comeback Isn't Finished

One of the surprises, at least on the surface, of the market's recent swoon was the outperformance of read on...

article imageETF Performance Review: Major Asset Classes | 19 Dec 2014

It’s all about real estate investment trusts (REITs) these days when it comes to bullish performance among read on...

article imageOil and Global Stock Markets Rebounding Sharply

So far so good on our expectation of a 4 to 5% pullback and then a resumption of the bull read on...

article imageGrading the FOMC

Love its members or loathe them, you have to admire the gradual impact the policy-making committee has had read on...

Advertisement
Popular Articles

Advertisement
Daily Sector Scan
Partner Center

Related Articles:

How To Profit From The Shutdown Aftermath
More Articles on: Medical



Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.