US health insurer Centene has agreed to buy rival WellCare Health Plans for around $15.3 billion in cash and stock. Including debt, the deal is valued at $17.3 billion. A tie-up between the two would create an entity with $97 billion in revenue and $5 billion in EBITDA, covering around 22 million people under one insurance provider. Shares of WellCare (NYSE: WCG) closed up more than 12%, while Centene shares (NYSE: CNC) dropped nearly 5%.
The move comes at a tenuous time for health insurers, as the Trump administration ups its rhetoric against the Affordable Care Act. The Justice Department filed a brief on Monday supporting a US District Court ruling from December that declared the entire program to be unconstitutional. Centene relies heavily on the ACA to generate its revenue, with Reuters reporting that the law accounts for around 40% of its overall earnings. While it wouldn’t completely cure the effects of a potential strike-down of the ACA, the acquisition of WellCare would likely help Centene shield itself from losses through a diversification of its revenue streams, as the move would increase the size of its Medicare and Medicaid businesses.
However, that increase also means the two companies will most likely have to contend with antitrust concerns. Centene and WellCare already serve a significant portion of the Medicare and Medicaid industries, and together they dominate the market in a handful of states. Once combined, the market share of the new entity could reach over 50% in several states, according to MarketWatch. Executives reportedly noted the overlap in a call with analysts but argued that they had already accounted for potential divestitures in the $500 million of synergies in the merger.
It’s unclear how the courts will react, as other mergers involving managed care have encountered legal challenges. CVS Health and Aetna, for example, faced some unexpected antitrust action as their $69 billion deal was wrapping up. Although it closed in November, Judge Richard Leon, who also heard the AT&T and WarnerMedia antitrust case, has halted the two from integrating and scheduled a hearing to discuss which witnesses should testify before he signs off on the merger, per Reuters. The deal—which required Aetna to sell its Medicare prescription business to WellCare to assuage antitrust concerns—has been criticized by the American Medical Association, among others. And its ultimate success might also be affected by the Centene-WellCare deal. Shares of CVS (NYSE: CVS) fell after news of Wednesday’s agreement, with The Street noting that the combined company could impact CVS’ market position by creating a larger direct competitor.
Other large healthcare M&A deals have also received significant antitrust scrutiny, such as Express Scripts and Cigna’s $54 billion deal last year. And while that did end up going through, it drew the ire of many politicians as Americans complained of higher drug prices. And the healthcare industry in general is receiving seemingly more attention than ever, with companies like Purdue Pharma and Johnson & Johnson facing lawsuits across the country alleging they propagated the opioid epidemic. Dealmakers and consumers alike will surely be watching how the Centene and WellCare tie-up progresses as the latest indication of any larger shifts for the industry.
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