Go to the Globe and Mail homepage

Jump to main navigationJump to main content



Wellpoint deal a boost for Obamacare Add to ...

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 (U.S.) 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 per cent 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 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 seven 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 some three per cent on the news.

Expected growth may explain that. But the synergies are probably a low-ball 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 an opportunity, the future of Medicaid relatively secure, and the enthusiasm with which investors have greeted this union, similar deals are surely being considered. Stock in Amerigroup rivals Molina Healthcare and Centene were up 15 and 20 per cent on the news respectively. The Supreme Court has given a real shot in the arm to Obamacare M&A.

Report Typo/Error

Next story




Most popular videos »

More from The Globe and Mail

Most popular