Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Trying to predict the future of health care right now is all but impossible, with the GOP realizing that actually repealing and replacing Obamacare is a bit tougher than holding meaningless show-votes. 

But despite that uncertainty, we already have the first post- or neo-Obamacare insurance merger: WellCare Health Plans Inc. is buying Universal American Corp. for $10 a share, or about $600 million. That will bump up to $800 million with the expected retirement of the company's preferred shares and convertible debt. 

This deal made sense pre-Trump. WellCare has been looking for M&A opportunities and to expand in Medicare Advantage, a privately administered alternative to traditional Medicare, which is Universal American's focus.

It makes even more sense under a Trump administration. With Medicaid and the individual exchanges in danger, Medicare Advantage seems like a safe bet to survive or even benefit. It's a GOP favorite that was bolstered and rechristened with its current name in the Bush administration in 2003. 

Universal American has jumped nearly 20 percent since the election for a reason. And WellCare is snapping it up at a fairly reasonable cost. 

Trump Bump
Medicare Advantage-focused Universal American got a big boost from Donald Trump's election, and now WellCare is buying it for $10 a share
Source: Bloomberg

WellCare's performance post-Trump has been more mixed. Its shares fell nearly 9 percent on November 9. WellCare does not participate in the possibly doomed individual insurance exchanges. But it is big in Medicaid, with 2.4 million enrollees. The GOP has been committed to curtailing a Medicaid expansion that helped extend coverage to millions, and may want further cuts to the program for those with limited resources to pay for health care.

Expansive
WellCare has a fairly sizable presence in Medicaid, which is a somewhat scary place to be in the age of Trump
Source: Bloomberg

WellCare has recovered since, as investors appear to realize it is less exposed than competitors such as Molina Healthcare Inc. and Centene Corp., which are heavily involved in the individual exchanges. Bloomberg Intelligence analyst Jason McGorman found WellCare will derive 4.6 percent of its 2016 operating profit from Medicaid expansion, compared to 18.1 percent for Molina and 9.3 percent for Centene. 

And WellCare has taken Medicaid licks already. A big chunk of its expansion-related membership is in Kentucky, a state where a Republican governor has gotten a jump on the rest of the nation in trying to gut its successful Medicaid expansion and cut benefits for the state's poorer residents. 

All in all, it's not the worst time for WellCare to cut dependence on the program. Further expansions are off the table. Existing expansions may be eliminated or cut back. Paul Ryan's health-care plan -- a likely blueprint for a TrumpCare replacement for the ACA  -- would shed an estimated 18 million people from Medicaid over the next decade.

Medicare Advantage is a logical place for WellCare to turn. The program is right in the GOP sweet spot, and analysts including Leerink's Ana Gupte are bullish on its prospects. It's a privately administered alternative to a government program and offers more choice to seniors. It was already a growth area -- membership in these plans has tripled since 2003. The ACA reduced payments to Medicare Advantage, so a repeal may benefit companies that focus on it. Major Medicare reform, apparently now on the table, could be even more beneficial. 

Universal American would add about 114,000 Medicare Advantage members to WellCare's overall membership, increasing it by about a third. And WellCare may not be done; it's been mentioned as a likely bidder for Medicare Advantage assets that may be shed by Aetna Inc. and Humana Inc. as they try to close their mega-merger. 

WellCare's growing footprint in Medicare Advantage may make it a more compelling bidder in the government's eyes. And though this deal isn't small, WellCare will still have more than $3 billion in cash to spare afterwards, and a manageable debt load. 

Especially given the recent run-up in Universal American's shares, the price is right. The offer is only a 12 percent premium to Wednesday's closing price, though it's a heftier 32 percent premium to the company's 60-day volume-weighted average, WellCare says. But it's actually a solid discount to Universal American's share price as recently as last year, before the company sold struggling insurance businesses at a loss to focus more narrowly on Medicare Advantage.

Solid Deal
WellCare is paying a premium to Universal American's recently depressed share price, but is getting a discount on highs reached as recently as last summer
Source: Bloomberg

It's tough to be aggressive when everyone else is uncertain. But WellCare appears to be pulling it off.

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

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net