The Mad Dash for Medicare and Medicaid Dollars

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Another competitor has entered the mad dash for more Medicare and Medicaid dollars. Major health insurer Aetna (NYSE: AET  ) announced its plans to buy Coventry Health Care (NYSE: CVH  ) . The cost of the acquisition is pegged at $7.3 billion, which reflects a purchase price of $42.08 per share for Coventry stockholders.

Why now?
Aetna's announcement comes on the heels of other major players engaging in acquisition deals. In July, WellPoint (NYSE: WLP  ) disclosed its intention to buy Amerigroup. What is driving this merger activity? Insurers want bigger slices of the Medicare and Medicaid pies.

Both Aetna and WellPoint referenced expansion of their Medicare and Medicaid market presence as benefits of their respective acquisitions. Aetna stated that the deal increases its share of revenues from government business to more than 30%. That's a jump of 7% from the current level.

It's no coincidence that two major health-care acquisitions were announced this summer within weeks of each other. The June Supreme Court decision upholding much of Obamacare cleared the way for insurers to begin focusing in earnest on how to capitalize on the legislation.

One key piece of Obamacare is an expansion of Medicaid. Although the Supreme Court's decision allows states to refuse to expand their Medicaid rolls without losing federal money, several states plan to move forward with extending Medicaid benefits to more citizens.

Aetna undoubtedly sees the acquisition of Coventry as a way to reap financial benefits from this impending growth in Medicaid. Over the longer term, Aetna knows that the increasing numbers of seniors eligible for Medicare should present more opportunities also. Coventry offered a relatively easy way to gain share in both markets.

What it means
One thing the Aetna/Coventry deal does not mean is that the Medicaid managed-care market will be significantly more consolidated. Based on CMS data from 2009, the combined Medicaid market share for the two companies will only be around 4%.

However, the move does position Aetna to benefit from increased government program exposure. The company projects accretive earnings per share of $0.45 in 2014 and $0.90 in 2015.

There are also ripple effects of the acquisition. CVS Caremark (NYSE: CVS  ) currently provides pharmacy benefits management services for Aetna, while Express Scripts (Nasdaq: ESRX  ) is the PBM provider for Coventry after its purchase of Medco.

Analysts at ISI Group project that CVS could gain $0.04 to $0.06 earnings per share, assuming it is the PBM company for the new Coventry block of business. Express Scripts could lose $0.07 to $0.09 in earnings per share as a result of the acquisition.

Will others join the Medicare/Medicaid mad dash? Some analysts think that prospect is unlikely. However, the continued fragmented state of the Medicaid market in particular leaves the possibility open.

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Fool contributor Keith Speights owns no shares in the stocks mentioned above. The Motley Fool owns shares of Express Scripts Holding and WellPoint. Motley Fool newsletter services have recommended buying shares of WellPoint, Express Scripts Holding, and Coventry Health Care. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 23, 2012, at 12:22 AM, MHedgeFundTrader wrote:

    While in Zermatt, Switzerland recently, I took the opportunity to undergo my annual physical. Over the years, I have discovered that American doctors are so paranoid about getting sued that I can never get a straight answer about anything, so I do all of my physicals abroad.

    I like visiting Dr. Christian because he is cut from the same cloth as I. He is a small wiry guy without an ounce of fat, and keeps his hair tied behind in a ponytail. Nothing like treating your patients through example. He has served as the team doctor on several Himalayan expeditions, reaching the incredible altitude of 25,000 feet without oxygen. He includes Mount McKinley and Aconcagua on his resume.

    He gave me the good news: I had blood pressure of 110/70 and a resting pulse rate of 50. This was at an altitude of 5,500 feet, which always elevates one’s blood pressure. The bottom line was that I had the heart of a teenaged Olympic athlete. He told me that whatever I was doing, to keep on doing it. I said that would be strapping on a 60 pound backpack and climbing the 1,500 foot mountain in my backyard every night after work. He answered that would explain everything.

    Dr. Christian usually allocates extra time for patients my age to deliver them bad news. That was unnecessary in my case. So we killed time trading notes on our favorite climbs.

    I also grilled him on the state of the Swiss medical system. He complained that it was going downhill, but was nowhere near as bad as in the US, where his brother practices medicine. Everyone here gets medical care after paying a small premium. His liability insurance was only $3,000 a year, compared to $100,000 in the US. The only malpractice suits in Switzerland are brought by Americans, and they always lose.

    The main reason medical costs were so low is that the people of Switzerland were so much healthier. Walking around the streets here, most people look like they are triathletes. And they do this despite smoking like chimneys. Maybe they are related?

    Life expectancy in Switzerland is 82.2 compared to only 78.2 in the US. And the quality of life at old age is much better. Obesity is rampant at home, but rare in the Alps. Diabetes is unusual in Switzerland, but epidemic in the US. Over 400,000 Americans undergo kidney dialysis in the US, while the treatment is almost unheard of in Europe. This is why the US is spending 12% of GDP on health care, on its way to 17%, while Switzerland is flat lining at 8%, with an older population.

    I thanked Dr. Christian for his advice. The total bill? $200. I headed to the local pharmacy to get a one year supply of my anti-cholesterol drug, which I can buy 90% cheaper than at home. That allows me to keep my total health care costs under $500 a year.

    I then celebrated my good fortune by stepping across the street for a bratwurst and a beer, which my American doctor once banned me from. There, I planned my coming assault on the Matterhorn.

    The Mad Hedge Fund Trader

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