By Jon Kamp
WellPoint Inc.'s (WLP) purchase of Medicaid insurer Amerigroup
Corp. (AGP) catapults WellPoint deep into the chase for a huge--but
potentially risky--new market covering people with costly health
problems.
Known as dual-eligible patients, these are more than nine
million Americans who qualify for both Medicaid and Medicare
because of factors like age, disability and poverty. Rather than
benefiting from the double coverage, they often wind up with poorly
coordinated care from the systems' different rules. The theory is
that better management should lower their costs, estimated at about
$300 billion today, by doing things like helping patients with
chronic conditions avoid unnecessary hospital trips.
"The dual-eligible expansion opportunity is tremendous and was a
driving force for this transaction," said Angela Braly, WellPoint's
chief executive, on a conference call Monday. By purchasing
Amerigroup, WellPoint becomes the biggest Medicaid insurer by
adding a fast-growing company with contracts and connections in
some key states.
The health-care overhaul law recently upheld by the Supreme
Court created an office in the Centers for Medicare & Medicaid
Services that aims to streamline the dual-eligible system. It gave
grants to several states to help foster more coordinated efforts,
and many other states are moving under their own power to do the
same.
Serving this emerging market may require the ability to
carefully manage patients' health problems, the capital to launch
business, and relationships within states that can be leveraged to
win contracts.
WellPoint built up on one front last year by purchasing
CareMore, a firm that specializes in caring for seniors with
special needs. Now it's adding Amerigroup, which has experience
competing for--and winning--state contracts on the Medicaid front.
The transaction values Amerigroup at roughly $4.46 billion, or $92
per share.
"With this deal, WellPoint becomes a key player in the dual
opportunities across the country," said Citigroup analyst Carl
McDonald. He noted that many larger plans in the managed care
industry aren't that well-positioned to compete for dual patients,
despite their overall heft, because of their "relatively modest
Medicaid presence."
But WellPoint with Amerigroup will have about 4.5 million
Medicaid members, pushing it ahead of UnitedHealth Group Inc.
(UNH).
A typical dual patient might be on Medicare due to age and on
Medicaid because chronic health problems drained their savings,
although younger patients with disabilities are also in the system.
These are "among the sickest and the poorest" people covered by the
government, the Kaiser Family Foundation has said.
These patients can rack up significant expenses. WellPoint noted
they represent about 20% of the Medicare population but 31% of
costs. On the Medicaid side, they represent 15% of enrollment but
39% of costs.
The company highlighted 13 states with "near-term dual eligible
opportunities," including big ones like California, Texas, Florida
and New York, where the combined WellPoint/Amerigroup will have a
presence. Overall, the 19 states where the companies have
operations comprise more than $180 billion in spending on dual
patients, significantly more than half of overall U.S.
spending.
WellPoint is the first big managed-care firm to pull the trigger
on buying a Medicaid insurer to target this opportunity, but the
market clearly anticipates there could be more to follow. Shares of
Centene Corp. (CNC), Molina Healthcare Inc. (MOH) and WellCare
Health Plans Inc. (WCG) soared at least 17% on the news their
competitor Amerigroup was being bought out.
Still, some industry executives previously talked down the idea
of buying Medicaid insurers because of high stock prices and tight
profit margins. Humana Inc. (HUM), which has a big focus on
Medicare plans but limited presence in Medicaid, has preferred to
go the partnership route, for example. It already has struck up an
alliance with a big Medicaid provider in Ohio and is aiming for
more.
The chase for the duals market also carries some risks. Insurers
in Kentucky and Texas have recently run into problems where costs
for new or expanded Medicaid markets were much higher than
expected, exceeding premium revenue, which hurts earnings.
Considering dual-eligible patients tend to have much more
complicated--and expensive--problems than those often covered by
traditional Medicaid plans, an unexpected cost problem could cause
significant trouble.
Susquehanna Financial analyst Chris Rigg believes duals are best
managed inside big firms that have cushion to handle potential cost
problems that flare up. "A lot more revenue equals a lot more risk"
in the duals market, he said.
Then again, better management of high-cost patients offers the
opportunity for big savings. WellPoint is betting it has assembled
the right combination of tools to get the job done.
"We clearly recognize those risks," Wayne DeVeydt, WellPoint's
chief financial officer, told reporters Monday.
Write to Jon Kamp at jon.kamp@dowjones.com