Centene buys WellCare. Here's what it means for CVS and Humana.

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Centene

purchased
WellCare Health Plans

$ 13.5 billion in a cash and stock transaction that would make the amalgamated company the largest government health insurance provider in America.

But investors in other health sectors should pay close attention to the progress of the transaction. This is because large mergers and acquisitions in the health sector affect a host of other companies, from the drug manufacturers to the pharmacy benefits managers. A transaction of this size could mean that investors must review their positions with insurers such as
Humana

(HUM), or pharmacy-benefit managers, known as PBM, as
CVS Health

(CVS).

The story back: In the United States, health care is complicated to say the least, with many moving parts. This transaction, for example, does not affect employer-based health markets. Centene (ticker: CNC) and WellCare (WCG) provide only government health care plans, but there are certainly a lot of them. The combined membership of both companies would include the Medicaid, Medicare and Affordable Care Act health exchange memberships.

Medicare is the American system of health benefits for the elderly. Medicaid is a federally funded and publicly administered health system. State authorities sometimes entrust this activity to private actors such as these two companies. According to the Kaiser Family Foundation, the number of enrollments in the Affordable Care Act in 2019 rose from 11.8 million in 2018 to 8.4 million in 2019, after peaking in 2016 at 12.7 million of members.

What's up: Centene and WellCare combined will generate sales of approximately $ 97 billion and will have 22 million members in all 50 states, according to Centene.
UnitedHealth

(UNH), by contrast, has generated more than $ 225 billion in revenue in 2018 and has nearly 50 million members. This agreement creates a bigger national player in health insurance.

As the transaction is under construction, WellCare shareholders will receive $ 120 in cash and 3.38 Centene shares for each WellCare share they own. This equates to approximately $ 289 per share, which is 15.5% higher than the current share price of WellCare. Such a wide spread between the two prices indicates that investors are worried about something in the deal. The so-called merger arbitrage extends over the Cigna (CI) -Express Scripts and CVS-Aetna contracts. Gordon Haskett analyst Don Bilson.

"Health care offers, in general, are hairy," says Bilson. Barron's.

The WellCare share rose 9%, while that of Centene fell 8% Wednesday.

Look forward: CVS could be hurt by the merger. WellCare spends between $ 15 billion and $ 20 billion a year on drugs, and CVS is WellCare's PBM. Centene uses RxAdvance to negotiate drug prices for plan members, and Centene could consider moving the WellCare business to its existing platform. The CVS stock was down 3.7% in Wednesday's trading.

Humana is another company to watch. Bilson wrote last week that investors were disappointed. Humana was not looking for an agreement with Medicaid. Humana organized a day of analysts last week and its shares fell 4% after the presentation. Humana shares have again fallen by 1% today. Centene-WellCare creates a stronger competitor for Humana and eliminates two potential Medicaid partners for Humana.

CVS and Humana did not immediately respond to a request for comment.

If understanding the implications of concluding transactions was not difficult enough, consider
Molina Healthcare

(MOH) stock. It dropped 9% Wednesday, in part, after President Donald Trump tweeted the Republicans who would become the health care party. This is not just mergers and acquisitions: it seems that a single tweet can make the US healthcare landscape even more complicated.

Of course, the Centene-WellCare agreement has not been finalized yet. An agreement of this size will probably be subject to regulatory control.

In reality, SVB Leerink analyst Ana Gupte suspects that some divestments in states where both companies have activities will be required to get the regulators agree.

Write to Al Root at [email protected]