Why Medicaid-Based Health-Plan Providers Soared

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: If you can't beat 'em, join 'em! That's WellPoint's (NYSE WLP) philosophy after it agreed to purchase Medicaid-based health-plan provider Amerigroup (NYSE: AGP  ) for $4.46 billion in cash, or $92 per share. The news has Amerigroup shares up 38%, while its peers Molina Healthcare (NYSE: MOH  ) and Centene (NYSE: CNC  ) are also popping by 15% and 21%, respectively.

So what: The move to buy Amerigroup comes shortly after the constitutionality of the Patient Protection and Affordable Care Act was upheld by the Supreme Court. The bill is expected to expand the number of Medicaid-approved patients by 16 million in 2014, and it was widely expected that Molina, Centene, and Amerigroup would be receiving the lion's share of these newly insured people.

WellPoint's all-cash purchase of Amerigroup will more than double the number of patients in state-sponsored health-care programs to 4.5 million. It will also give WellPoint a combined presence in 13 states, including the four states with the largest annual budget for dual-eligible citizens (approved for both Medicare and Medicaid). Amerigroup is expected to add to WellPoint's earnings as soon as 2013 and could add as much as $1 to EPS by 2015. The deal is now subject to regulatory approval.

Now what: The Supreme Court upholding the constitutionality of the ACA was a crushing blow for WellPoint, which relies on small group and individual businesses for a large chunk of its revenue. With no method of excluding people with pre-existing conditions and being forced to spend 80% of premiums on patient care, WellPoint's earnings were practically going to be capped.

Today's move to buy Amerigroup removes that cap on profits and makes WellPoint a dual threat in that it'll have a significant number of highly profitable dual-eligible patients in its network. It also turns the tables and allows WellPoint to take advantage of the Medicaid expansion in 2014 rather than allowing itself to be harmed by it.

The buyout opens the door for potential buyouts of Molina and Centene as well. Both have struggled with controlling costs as of late, but Molina, for instance, has a healthy cash balance and does have access to millions of patients in California -- a figure that may prove to be the lure for a larger health-plan provider. This may not be the last buyout we witness among health-care providers prior to the implementation of the ACA in 2014.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of WellPoint. Motley Fool newsletter services have recommended buying shares of WellPoint and Amerigroup. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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