Source: Shutterstock It’s about managed care.
It’s true that Obamacare partially helped bring more people into managed care plans — namely Medicaid. But the Trump Administration’s efforts to declare the law unconstitutional have nothing to do with this transaction. Assuming that Obamacare is here to stay — even if it was declared unconstitutional it would take years to undo something that’s now woven into the fabric of our society — CNC stock is in a good position.
That’s because Centene was already making money from Medicare and Medicaid. It was making money because, unlike traditional insurance companies, managed care companies know how to connect income to outgo.
The Managed Care Model
Managed care isn’t about sickness but, as target WellCare’s name implies, wellness.
By monitoring patient health closely, by managing chronic conditions, and by owning (or at least controlling) the facilities which deliver care to patients, managed care companies gain cost control for themselves and improved lives for the people they care for.
Chronic conditions like diabetes and heart disease represent 96% of Medicare spending and 83% of Medicaid spending. These costs can be managed only if doctors are able to stay on top of patients, getting them to exercise, eat right, stop smoking, cut back on the booze and (most important) take their medicine when it’s prescribed.
Managed care companies are set up to do this. They also use standard formularies for drugs. CNC is also invested in a Pharmacy Benefit Manager, RxAdvance, run by one-time Apple (NASDAQ:AAPL) CEO John Sculley, giving it better control of drug costs, the primary cost driver in modern medicine.
Why Buy Wellcare
Centene and Wellcare use the same managed-care model. Combining them produces scale.
WGC and CNC stock brought in a combined $75 billion last year, and nearly $1.5 billion of that hit the net income line. Combined they have a market cap of about $33 billion.
Compare that to traditional insurer Cigna (NYSE:CI), which earned $2.6 billion on revenue of $48 billion last year, and carries a market cap of $61 billion.
The difference is that Centene and Wellcare can make money on what Medicare and Medicaid pay. Cigna uses the Preferred Provider Option (PPO) model, a network of doctors, clinics and hospitals people may be referred to, but over whose pricing they have very limited control.
Centene has been able to grab 20% of the individual “Obamacare” market. While traditional insurers like Anthem (NASDAQ:ANTM), Aetna (NYSE:AET) and United Healthcare (NYSE:UNH) have been abandoning the Obamacare exchanges, claiming they can’t make money in them, Centene has been expanding in them, market by market, because its Medicare and Medicaid experience shows its model can make money in them.
Wellcare, which got its start in Florida, brings 5.5 million more customers to the party and uses a care management program called Helios, from VirtualHealth , to deliver care management as a service.
Even without Wellcare, CNC stock was one I liked, up 271% over the last five years as its business model continued to churn out profitable growth. Wellcare had become its only peer in this and, now, will become its partner.
The Bottom Line on CNC Stock
There are only two companies in the health care delivery space that should matter to investors today, Centene and United Health.
United Health matters because of its size, with $226 billion in revenue, a market cap of $233 billion, and the leading IT system in the space, Optum. Centene mattered because of its growth — CNC stock is the only one in the space to have outperformed United Health’s over the last five years — and beat United Health’s Harken Health on the exchanges.
Now, with Wellcare, Centene is gaining the scale to bring its managed care model up against that of United on a level playing field. It may be one of the best, and most important, market battles of the next decade.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL.
More From InvestorPlace
- 2 Toxic Pot Stocks You Should Avoid
- 10 Tech Stocks With Key Products That Face an Uncertain Future
- 7 SaaS Stocks to Buy for Long-Term Gains
- 5 Semiconductor Stocks That Are Scorching Hot Buys
The post Wellcare Acquisition Brings More Managed Care to CNC Stock appeared first on InvestorPlace.