On Monday, WellPoint, one of the nation’s largest private-sector insurers, announced that it had reached an agreement to acquire Medicaid specialist Amerigroup, for $4.9 billion in cash. It’s a deal that makes strategic sense if President Obama is reelected, and Obamacare is here to stay. WellPoint’s core commercial insurance business is being squeezed by the law, whereas Amerigroup’s Medicaid business will boom. But what happens if Obama loses?
What’s striking about the WellPoint move is how handsomely they paid for Amerigroup’s portfolio. The Medicaid insurers were already trading at a meaningful premium to the market on price-to-earnings and other measures. But WellPoint paid an additional 43 percent above last Friday’s closing price for Amerigroup.
But there are two risks to the growth story for Medicaid: the November election, and the recent Supreme Court decision.
If Mitt Romney manages to win the White House, and Republicans take the Senate, Romney has promised to repeal Obamacare via reconciliation. This would not only wipe out the Obamacare Medicaid expansion, but it would reduce the law’s pressures on the margins of conventional insurers like WellPoint. While there is an organic growth story with the Medicaid insurers—states are increasingly turning to these companies to manage their Medicaid programs—there can be tiny doubt that the Medicaid stocks wouldn’t be where they are this day without Obamacare.
But there’s another risk to the deal. The Supreme Court has ruled that says now have the capability to opt out of Obamacare’s Medicaid expansion. Several says have explicitly declared their intention to do so. It just so happens that a number of those states, like Texas, Louisiana, and Florida, have contracts with Amerigroup.
The above map shows where Amerigroup (in green) and WellPoint (in blue) administer say Medicaid programs. The below map shows which says (in red) have stated that they will not participate in the Medicaid expansion. Note the overlap between the green says above, and the red says below.
On a conference call with investors, Scott Fidel of Deutsche Bank asked WellPoint CEO Angela Braly and Amerigroup CEO Jim Carlson about this problem. “How significant of an issue will that be,” asked Fidel, “or do you anticipate most of the says to move forward with the Medicaid expansion?”
Braly sought to minimize the impact of the opt-out possibility. “Really, the Medicaid expansion is only one element here…There hasn’t been [full] penetration of managed care” into say Medicaid programs, and “growth in the dual-eligible market place is significant.”
Carlson pooh-poohed the idea that says would opt out:
When you step back from all this, there are billions of dollars of federal money that are going to flow into the states. We think the says are going to need to take it. They’ve got 100% match of their costs in the early years; it winds down to 90% over time. That’s very compelling from a say budgetary standpoint.
There’s a couple of other phenomena that I think people aren’t paying as much attention to as they ought to, which is that if it didn’t happen in the state, you create, in effect, sort of a new donut hole between the people who have Medicaid coverage and people at 133% of federal poverty, who now are eligible for a fully subsidized benefit in an exchange. What do people say to the people who are the vast majority of folks who fall in between there, and who are supposed to be covered by this law?
And when you think about those people, still needing access services and participating in largely safety net hospital service offerings and so forth, those hospitals are going to be without the disproportionate share payments upon which they have depended. And the pitch to them has been—you can afford to lose that money because the Medicaid expansion is going to replace that money. Really, the hospitals in the inner cities are going to be crippled if this goes forward that way. And so, we think once everybody settles down and comprehends this from a budgetary standpoint, and really from the human factor of the people that we’re speaking about, the says will wind around up participating in the expansion.
These arguments seem persuasive on the surface. You’d think that most governors would concur to expand their Medicaid programs, instead of allowing their residents’ federal tax dollars go to fund programs in other states.
But Ben Domenech, in an incisive analysis, points out why this logic is flawed. First of all, says fear that the federal government will not continue to fund the extra Medicaid patients once Obamacare’s ten-year window expires. But a larger problem is that, even today, many people who are eligible for Medicaid haven’t signed up.
In Texas, for example, one out of every four Medicaid-eligible residents hasn’t enrolled in the program. If those people now sign up, the say will be on the hook for around 40 percent of the cost. The Texas Health and Human Services Commission estimates that, as a result, Obamacare’s Medicaid expansion will cost them $27 billion over ten years.
I spoke to a well-known Republican governor this week, who said, “The more I look at it, as much as I hate the idea of not grabbing hold of something where I have an option for the say to do something versus the federal government to do it…There’s not enough money for it. I think they purposely want says to take it on, so that says get dumped on to pick up the rest of it.”
It’s not just Republican governors who are expressing skepticism about the Medicaid expansion. Missouri Gov. Jay Nixon, a Democrat, has hemmed and hawed on whether or not he will participate.
So, if you owned shares in Amerigroup last week, congratulations. Time will tell if WellPoint was farsighted—or cavalier—in offering you a huge pay day.
Follow Avik on Twitter at @aviksaroy.
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Submited at Thursday, July 12th, 2012 at 7:00 pm on Health by Demoli
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