The $17.3 billion Centene-WellCare deal has Wall Street wondering how much the health insurers will have to give up for the deal to close

Reuters

Health insurer Centene is acquiring rival WellCare in a deal worth $17.3 billion, the companies said Wednesday.
The health insurers are known for offering plans through Medicaid and Medicare, as well as on the individual exchanges. The acquisition bulks up Centene’s presence in the Medicare Advantage market.
The deal has Wall Street analysts wondering how much the two companies will have to divest for the deal to be completed.

A $17.3 billion deal between two health insurers has analysts wondering what the two might have to give up to pass regulatory scrutiny.

On Wednesday, Centene said it’s acquiring its rival WellCare. Under the terms of the deal, Centene will pay WellCare shareholders $305.39 a share. The companies expect the deal to close in 2020.

The two companies combined have a big presence in the government funded health insurance programs Medicaid and Medicare, as well as a big presence on the individual exchanges set up under the ACA. All in, the two companies cover about 22 million Americans.

It’s a departure from the mega-insurance deals that closed in 2018, in which CVS Health, which owned a pharmacy and a pharmacy benefit manager, bought health insurer Aetna. Cigna for its part picked up pharmacy benefit manager Express Scripts, redrawing the lines of what constitutes a healthcare company. In comparison, a merger between two health insurers is more clear cut.

"This is a return to the past where you see simple similar companies merging in order to get scale to get cost synergies," MUFG senior healthcare services equity research analyst Jason Twizell told Business Insider.

For many on Wall Street, the deal came as a surprise. Centene’s stock closed down 6% on Wednesday, though WellCare’s stock was up 11%.

Analysts and investors expected to see Centene be the takeover target for one of the big commercial plans that needed to bulk up its presence in government-sponsored programs, like Cigna or now-CVS-owned Aetna. However, the two are already tied up working through their own mega-mergers.

Potential divestments

Because WellCare and Centene are both big players in the Medicaid market, it poses the question of what might have to be divested in order for the deal to go through. In states like Nebraska, Georgia, Florida, and Illinois, Centene and WellCare both have a big presence in the Medicaid market.

BMO Capital Markets analyst Matt Borsch said in a note that he estimates the two states with the largest combined presence are Missouri, in which the two companies combined have a 78% market share, and Georgia, where they have a 60% market share.

Divesting in Georgia and Missouri, he said, would reduce the two’s combined Medicaid enrollment by 20%.

"That might or might not be too much, depending on the considerations applied to evaluation of the merger," Borsch said.

But it’s possible the divestitures might not have to happen at all, Twizell said. State Medicaid organizations could simply restructure so there are more plan options beyond what Centene/WellCare offer.

It remains to be seen how the divestitures shake out, and what aspects may or may not fall under antitrust scrutiny.

"We haven’t seen a large Medicaid deal review before," Cowen managing director and senior analyst Charles Rhyee told Business Insider.

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