Expanding health coverage to more than 30 million Americans remains politically contentious. But the Supreme Court’s decision not to overturn the law means that it’s here to stay. The increased number of covered patients is a lucrative opportunity for insurers that helps justify juicy merger premiums. That’s the logic behind WellPoint’s pricey $4.5 billion bet on Amerigroup. More deals are likely.
Amerigroup is one of the biggest providers of managed care for Medicaid, the government program covering poor patients. Medicaid already accounts for 24 percent of the average state’s budget, according to the National Association of State Budget Officers. So getting costs under control is a necessity. Encouraging patients to emphasize preventive care rather than make trips to the emergency room can yield big savings – and Amerigroup takes a chunk of that.
With Medicaid’s budget expected to reach $587 billion in 2014, and only about a fifth of these patients currently in managed care, the opportunity is obvious. But the new law effectively supercharges growth, making at least 7 million people eligible for Medicaid in the states where Amerigroup operates.
WellPoint is paying up to grab this opportunity. At 23 times estimated 2012 earnings, the company is baking in a lot of growth. Moreover, the $125 million of estimated annual synergies over three years are only worth about $650 million currently when taxed, discounted and capitalized. That’s just half the $1.3 billion premium. Yet investors sent WellPoint’s stock up 3 some percent on the news.
Expected growth may explain that. But the synergies are probably a lowball estimate – it’s notable that WellPoint said there were “at least” $125 million. Throwing in too high a figure might encourage regulators and lawmakers to bargain harder. The combined company may also have more heft in negotiations with hospitals and the like.
With such a large opportunity, the future of Medicaid relatively secure, and the enthusiasm with which investors have greeted this union, similar deals are surely now being considered. Stock in Amerigroup rivals Molina Healthcare and Centene were up 15 and 20 percent on the news respectively. The Supreme Court has given a real shot in the arm to Obamacare M&A.
Read more at Reuters Breakingviews.