Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Aetna and Humana are certainly hoping their $37 billion combination will get approved, but at least one other company should also be rooting hard for the deal to get done and that's smaller rival WellCare. 

Aetna and Humana dropped on Monday amid reports that the health insurers are facing an increasingly uphill battle to sell their mega-merger to regulators. They're hoping a divestiture of Medicare Advantage policies covering about 350,000 people to either WellCare or a company like it will help make their case. The jury's still out on whether that's going to be enough for the Department of Justice (more on that later), but for WellCare, it's clear a deal would be a boon.  

The $5 billion insurer has largely sat out of the industry's takeover frenzy over the past year. It's relatively small size has meant it's typically been cast in the role of potential target rather than would-be acquirer. WellCare still could draw interest, particularly if Anthem's $50 billion-plus purchase of Cigna falls apart and puts both companies back on the prowl. But if WellCare is going to go it alone, it needs to get bigger.

Among Giants
WellCare is the eighth-largest U.S. provider of managed care by revenue, trailing well behind Aetna and Humana.
Source: Bloomberg
Centene revenue includes Health Net, which had $16.2 billion in revenue in 2015. The deal closed in March.

Every corner of the health-care industry -- from drugmakers and medical-device manufacturers to hospitals and physician-outsourcing companies -- has been consolidating in an attempt to one-up each other at the negotiating table. That puts WellCare and other small insurers in a tough spot, even without an Aetna-Humana or Anthem-Cigna mega-deal. WellCare is the eighth-largest U.S. managed care provider by sales and last year brought in only about a quarter of the revenue earned by Humana or Aetna. 

Gobbling up the 350,000 Medicare Advantage policies said to be on offer from Aetna would double WellCare's share of that market and move it ahead of a stand-alone Cigna based on 2015 tallies, according to Bloomberg Intelligence. The aging baby boomer population has made Medicare a coveted coverage area for insurers, with the Kaiser Family Foundation estimating total enrollment in the program will climb to more than 90 million by 2050, compared with about 57 million currently. Doubling down should be a boon to WellCare's revenue growth, which is set to slow this year to a paltry 1.5 percent after years of big gains.

Tapering Off
Coming off a period of growth, WellCare isn't expanding as fast as it once was.
Source: Bloomberg

WellCare's existing Medicare Advantage presence also gives it an...advantage in pursuing Aetna and Humana's assets.

In a bid to limit their required divestitures, the companies have argued that the government's traditional Medicare coverage should count as a competitor to their offerings. That's a tough sell, according to Bloomberg Intelligence's Jennifer Rie and Jason McGorman. Medicare Advantage and traditional Medicare plans differ in the ways payments are handled and the doctor pool available to patients. The emphasis for regulators is likely going to be on how legitimate Aetna and Humana's Medicare Advantage-focused rivals are -- or can become. 

According to a report Monday from MLex, the DOJ is skeptical that policy offloads like the one Aetna is proposing will do enough to establish rivals in regions where they didn't previously operate. It's not clear what states are involved in the 350,000 patient-package on offer. WellCare doesn't have a sizable Medicare Advantage presence in many of the states where Aetna and Humana have significant overlap such as Kansas, Missouri or Iowa.  But the company does operate in nearby states including Illinois and Kentucky.

One of WellCare's biggest markets is Florida, another state where Aetna and Humana have overlap, and it's been in the Medicare Advantage business for a while so presumably has a pretty good idea of what it's doing. That should make WellCare a more appealing partner in regulators' eyes than Centene, the other bidder eyeing Aetna's policies. The $12 billion company expanded its Medicare Advantage presence through its purchase of Health Net this year, but still trails behind WellCare in that market. Centene also may be hobbled by the hefty debt load it's still carrying from the Health Net deal, while WellCare has a net cash position. 

Movin' On Up
WellCare would leapfrog a stand-alone Cigna in the Medicare Advantage market with the addition of 350,000 policies from Aetna.
Source: Bloomberg Intelligence, CMS, Kaiser Family Foundation
Centene had 303,100 members in Medicare plans, including Medicare Advantage and dual Medicaid/Medicare offerings as of March 31.

In any event, there may be enough Medicare Advantage policies to go around.  If you believe the MLex report, Aetna and Humana may need to offer up a bigger package of asset sales and target the divestitures to competitors who operate in or near their most problematic areas to get a deal done. When the combination was announced last year, a Sterne Agee CRT analyst estimated that the companies would need to shed 575,000 Medicare Advantage members versus the 350,000 currently on the table. 

If it comes to that, WellCare should grab what it can. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. For what it's worth, New York's insurance regulator has approved the deal -- with conditions -- in one of the last state signoffs needed, people familiar with the matter said.

  2. Anthem and Cigna are also potential bidders, should their deal fall apart. 

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net