What the Centene and WellCare Deal Means for CVS and Humana


Al Root

Mar 28, 2019

Centene is buying WellCare Health Plans for $13.5 billion in a cash-and-stock transaction that would make the combined company the largest government health insurance provider in America.

But investors in other health care stocks should pay close attention to the deal’s progress. That’s because large health-care mergers and acquisitions affect a host of other companies, from drugmakers to pharmacy-benefit managers. A deal of this size could mean investors need to revisit positions in insurers like Humana (HUM), or pharmacy-benefit managers, known as PBMs, like CVS Health (CVS).

The back story: Health care in the U.S. is complicated to say the least, with plenty of moving parts. This deal, for instance, doesn’t affect employer-based health markets. Centene (ticker: CNC) and WellCare (WCG) only provide government health-care plans, but there are certainly a whole lot of those. Combined membership for both companies would span Medicaid, Medicare, and Affordable Care Act health exchange memberships.

Medicare is America’s health benefit system for the elderly. Medicaid is the federally funded, state-administered health system, which state authorities sometimes farm out to private players such as these two companies. Affordable Care Act enrollment in 2019 is down to 8.4 million in 2019 from 11.8 million in 2018, after peaking in 2016 at 12.7 million members, according to the Kaiser Family Foundation.

What’s new: The combined Centene and WellCare will generate about $97 billion in sales and have 22 million members in all 50 states, according to Centene. UnitedHealth (UNH), in contrast, generated more than $225 billion in 2018 sales and counts nearly 50 million members. This deal creates a more significant national health insurance player.

As the deal is currently constructed, WellCare shareholders will receive $120 cash and 3.38 Centene shares for every WellCare share they own. That works out to about $289 a share, which is 15.5% higher than WellCare’s current stock price. A spread that wide between the two prices indicates investors are worried about something in the deal. The so-called merger arbitrage spreads on the Cigna (CI)-Express Scripts and CVS-Aetna deals were both wide, too, says Gordon Haskett analyst Don Bilson.

“Health care deals, in general, are hairy,” Bilson explains to Barron’s.

WellCare stock surged 12% on the news in Wednesday trading, while Centene shares fell 5%.

Looking ahead: CVS could be hurt by the merger. WellCare has about $15 to $20 billion in annual drug spending as part of its medical costs, and CVS is WellCare’s PBM. Centene uses RxAdvance to negotiate drug prices for plan members, and Centene could plan to move the WellCare business onto its existing platform. CVS stock was down 3.7% in Wednesday trading.

Humana is another company to watch. Bilson wrote last week that investors were disappointed Humana wasn’t aggressively seeking a Medicaid deal. Humana held an analyst day last week and its stock dropped 4% after the presentation—Humana shares fell another 1% today. Centene-WellCare creates a stronger competitor for Humana and removes two potential Medicaid deal partners for Humana.

CVS and Humana didn’t immediately respond to a request for comment.

If understanding the implications from deal-making wasn’t enough of a challenge, consider Molina Healthcare (MOH) stock. It dropped 9% Wednesday, in part, after President Donald Trump tweeted Republicans would become the party of health care. It isn’t just M&A—it seems one tweet can suddenly make the landscape for U.S. health care even more complicated.

But, of course, the Centene-WellCare deal isn’t done just yet. A deal this size will likely face regulatory scrutiny.

In fact, SVB Leerink analyst Ana Gupte suspects some divestitures in states where both companies have operations will be required to get the deal past regulators.