Medicaid coverage provider Centene will pay about $6.3 billion to buy fellow insurer Health Net, as managed-care companies look to bulk up while adjusting to the federal health care overhaul.
The deal announced Thursday morning gives St. Lous-based Centene a chance to grow in two hot areas for health insurers, the state- and federally funded Medicaid program for the poor and people with disabilities, and the federally funded Medicare Advantage program, which has seen its overall enrollment triple over the past decade.
The health care overhaul is expanding Medicaid coverage to millions as it seeks to provide health insurance for more people.
Centene said the acquisition of Health Net would strengthen its presence in the nation's largest Medicaid market, California, and would create a combined company with about 6 million Medicaid members, making it one of the largest in the country.
The deal also will build Centene's Medicare business in several western states. As the baby boom generation ages, insurers are seeking to offer more Medicare prescription drug coverage and Medicare Advantage plans, which are privately run versions of the federally funded program for people over age 65 and the disabled.
About 16.8 million people were enrolled in Medicare Advantage plans as of March, according to the nonprofit Kaiser Family Foundation, which studies health care issues. That figure grew by more than 1 million from last year.
"I would say the growth prospect of Medicare is the prime reason someone would add that membership on to their books," said Vishnu Lekraj, an analyst who follows the industry for Morningstar.
St. Louis-based Centene Corp. plans to pay a combination of cash and stock valued at $78.57, based on Wednesday's closing price, for each Health Net share. That's a premium of about 21 percent over Health Net's closing price of $65.06. The deal totals about $6.8 billion counting debt.
Both companies' boards have approved the acquisition, which is expected to close early next year.
Investors and analysts have been expecting huge acquisitions in a managed care sector that is looking to grow as it adapts to the health care overhaul. Some say the Supreme Court's recent decision to uphold a key element of the overhaul might spark deals, because it removes an element of uncertainty that had been hanging over the companies.
On June 20, Anthem went public with a more than $47 billion cash-and-stock bid for Cigna, which Cigna rejected in a letter sent to Anthem the next day.
Both the Wall Street Journal and Bloomberg have reported, citing anonymous sources, that Aetna is pursuing the Medicare Advantage provider Humana Inc., in a deal that would join the nation's third- and fifth-largest health insurers.
Insurers see several potential advantages to combining. An acquisition would give them more customers over which to spread the costs of providing coverage and processing claims, and it lets them diversify and expand into new markets faster than they can by signing up new customers.
Size really matters in technology too, where insurers combining forces and strengthen a part of their business that is becoming vital.
Shares of Health Net soared nearly 16 percent, or $10.14, to $75.20 before markets opened and after the deal was announced Thursday, while Centene also jumped 2.6 percent, or $2.13, to $83.03, a sign that investors applaud the proposed deal.
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