WellPoint to Buy Amerigroup for $4.9 Billion in Cash

WellPoint Inc. (WLP), the second-biggest U.S. health insurer, agreed to buy Amerigroup Corp. (AGP) for $4.9 billion in cash to expand the number of Medicaid patients it serves as the U.S. health plan for the poor undergoes broad changes in how it is managed.

Amerigroup stockholders will receive $92 a share, the companies said in a statement today. The price is 43 percent higher than the closing level on July 6 for the Virginia Beach, Virginia-based company. WellPoint, based in Indianapolis, rose 5 percent to $62.89 at 9:30 a.m. New York time.
The acquisition will make WellPoint the top private manager of Medicaid benefits in the U.S., with 4.5 million members in the program. The deal should also boost the value of other insurers focusing on Medicaid, including WellCare Health Plans Inc. (WCG) and Molina Healthcare Inc. (MOH), said Thomas Carroll, a Stifel Nicolaus & Co. analyst in Baltimore.

“I think the Medicaid names will all trade up really hard on this news today,” Carroll said by telephone. “We’re somewhat surprised by Amerigroup’s willingness to sell. There’s just so much growth in the Medicaid space, why not do it yourself? But I guess the price was just too good to pass up.”

Molina, based in Long Beach, California, gained 12 percent to $25.85, while Tampa, Florida-based WellCare increased 11 percent to $58.84 and Centene Corp. (CNC), of St. Louis, jumped 12 percent to $32.31.
‘One Element’

The U.S. Supreme Court upheld President Barack Obama’s plans to add 17 million patients under Medicaid in a ruling two weeks ago, though it limited the administration’s ability to mandate state participation in the expansion.

The law’s expansion of Medicaid, set to begin in 2014, “is only one element here,” said WellPoint Chief Executive Officer Angela Braly in a conference call with analysts today. “We expect organic growth in the Medicaid segment. We did this deal no matter what and decided to do it no matter what the Supreme Court decided.”

The purchase of Amerigroup may also help WellPoint grab a larger share of the market serving “dual eligibles,” enrollees that receive both Medicare and Medicaid who are typically among the sickest and most costly to insure. There are 9 million such people in the U.S., accounting for $300 billion in annual spending, Braly said on the conference call.

States seeking to cut Medicaid costs are also increasingly turning to insurers to manage their existing programs, opening up new sources of revenue for the companies.
First Quarter

The acquisition should be completed in the first quarter of 2013, the companies said. WellPoint will pay with cash on hand, commercial paper, and by selling new debt.

Credit Suisse Group AG and Linklaters LLP advised WellPoint. Virginia Beach, Virginia-based Amerigroup’s advisers were Goldman Sachs & Co. And Barclays Plc, with Skadden, Arps, Slate, Meagher & Flom LLP providing legal guidance.

UnitedHealth Group Inc. (UNH), based in Minnetonka, Minnesota, is the largest Medicaid contractor with 3.5 million members. Medicaid is the joint state-federal program for the poor, while Medicare serves the elderly and the disabled.

The health-care overhaul passed in 2010 ordered states to open Medicaid to people making up to 133 percent of the federal poverty limit, or about $30,657 for a family of four this year.
Opting Out

The court ruling cleared the way for states to opt out of the expansion, saying the administration can’t strip current Medicaid funding from states that don’t want to go along. Republican governors in Florida, South Carolina, Louisiana, Iowa and Mississippi have said they won’t participate.

Obama’s Affordable Care Act will cover all of the added cost for states in the first three years of the expansion and 90 percent thereafter. That should be a powerful incentive for states to comply, along with a push from hospitals seeking help for patients who can’t pay their medical bills, said Amerigroup CEO Jim Carlson on the conference call.

“There are going to be billions of dollars of federal money flowing into the states and we think the states are going to have to take it,” Carlson said. “We think once everybody settles down and really understands this from a budgetary standpoint and really from a human standpoint” expansion will go forward.