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 Affordable Care Act. 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 the health insurer Aetna. Cigna, for its part, picked up the 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,” Jason Twizell, a MUFG senior healthcare-services equity-research analyst, told Business Insider.
Analysts and investors expected Centene to be the takeover target for one of the big commercial plans that needed to bulk up its presence in government-sponsored programs, such as Cigna or Aetna, which is now owned by CVS. However, the two are already tied up working through their own mega-mergers.
Because WellCare and Centene are both big players in the Medicaid market, a question that comes up is what might have to be divested in order for the deal to go through. In states such as Nebraska, Georgia, Florida, and Illinois, Centene and WellCare both have big presences in the Medicaid market.
Matt Borsch, a BMO Capital Markets analyst, 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 companies’ 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 and 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,” Charles Rhyee, a Cowen managing director and senior analyst, told Business Insider.