WellPoint aims to profit from Medicaid with Amerigroup purchase

The Los Angeles Times, By Walter Hamilton –

July 10, 2012: Health insurance giant WellPoint, the parent of Anthem Blue Cross, agrees to pay $4.9 billion for Amerigroup, which specializes in the Medicaid business.
One of the nation’s biggest insurance companies is trying to cash in on healthcare to the poor.

WellPoint Inc., the parent of Woodland Hills provider Anthem Blue Cross, agreed to pay $4.9 billion to purchase a company specializing in the Medicaid business. The all-cash deal calls forAmerigroup Corp. shareholders to receive $92 a share, a 43% premium over Friday’s closing price.

The acquisition of Amerigroup would make WellPoint the nation’s largest Medicaid administrator as the private sector moves increasingly into the government-run health program for the indigent.

Amid rising enrollment and an increasing need to control costs, managed-care companies are betting that cash-strapped states will turn to them to run their Medicaid programs.

“WellPoint is betting that there’s going to be a big push toward privatization of Medicaid,” said David Brailer, chief executive of Health Evolution Partners Inc., a healthcare investment firm in San Francisco. “Medicaid is a great business for large national operators to be in.”

The states allocate to the managed-care operators a set amount of money per patient. The companies would be responsible for providing insurance coverage to patients while generating a profit for themselves.

Handing off management of the program could appeal to lawmakers in another way — as political cover to escape the almost certain criticism that medical services are being cut, Brailer said.

Politicians could rail against the companies for any perceived diminution of Medicaid services “while all the time getting the benefit” of lower costs, Brailer said.

The deal would give WellPoint 4.5 million Medicaid participants across 19 states.

Shares of Amerigroup surged $24.45, or 38%, to $88.79, just shy of the $92-a-share offer price. WellPoint’s stock also got a lift, rising $2.04, or 3.4%, to $61.95.

Shares of other Medicaid-focused companies also advanced Monday, includingMolina Healthcare Inc.in Long Beach, which rose nearly 18%.
The acquisition of Amerigroup is premised in part on WellPoint’s being able to serve people who qualify for both Medicaid and Medicare, which serves the elderly.

Although so-called dual-eligible patients are among the sickliest, insurers can be compensated through two government pots.

After the deal, WellPoint said it would have operations in 13 states with “significant” dual-eligible opportunities, including the four largest states with $105 billion in annual dual-eligible spending.

“We believe that this combination will create an industry leader in the government sector serving Medicaid and Medicare enrollees,” Angela F. Braly, WellPoint chief executive, said in a statement.

WellPoint is the second-largest U.S. health insurer, and the Indianapolis company’s Anthem unit in California is the state’s largest for-profit insurer.
The deal comes at a politically sensitive moment for Medicaid.

President Obama’s healthcare plan, which was upheld by the Supreme Court late last month, calls for a significant expansion of the program, potentially swelling its rolls by as many as 17 million people.

Some states have refused to go along, arguing that enlarging the program would cause their own costs to balloon. Shortly after the WellPoint announcement Monday, Texas rejected an expansion of Medicaid coverage in its state.
And though the Supreme Court upheld the most visible element of Obama’s healthcare overhaul — the so-called individual mandate — it ruled that the federal government cannot force states to boost their Medicaid coverage.

Analysts expect, however, that states eventually will have to outsource their programs to private companies as Medicaid becomes increasingly complex and expensive. Under the Obama healthcare law, the federal government will pay 100% of the cost of the expansion initially and 90% in later years.

“Medicaid deficits trump politics,” Brailer said. “They’re so large and they’re going to get worse under any scenario.”

States opposed to Obama’s plan may relent if they’re allowed to receive funding through so-called block grants that could give them greater leeway in deciding how the money is earmarked, some experts say.

“That could lead to a real explosion in the [use] of privately managed Medicaid, and I’ve got to believe that was on the mind of WellPoint,” said Robert Laszewski, president of Health Policy and Strategy Associates, a consulting firm in Washington.

WellPoint and others hope to profit by implementing many of the cost-saving measures they have imposed on corporate medical plans over the years.

Source: John & Rusty Report via Brown & Word