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Centene–Health Net Entity Could Be Medicaid Leader

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Medicaid leadership

As we saw in Part 1 of this series, Centene (CNC) announced the acquisition of Health Net, a company with a diversified customer base across government-sponsored and commercial segments.

The chart below shows Medicaid enrollment of Centene and Health Net, along with those of the major players in the health insurance industry such as Anthem (ANTM), UnitedHealth Group (UNH), and Aetna (AET). Based on the number of Medicaid enrollees, the combined Centene–Health Net entity should be a leader in the Medicaid market.

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External drivers

The Centene–Health Net acquisition was announced just a week after the Supreme Court’s decision to uphold tax subsidies for people purchasing health insurance from federally run exchanges. Tax subsidies have been a major driver attracting people to purchase health plans from these exchanges. This ruling has helped to create a favorable environment for health insurers seeking acquisition targets.

According to RAND Corporation research, if the Supreme Court’s decision had canceled the subsidies, it would have led to loss of coverage for about 11 million people, severely affecting the health insurance industry’s margins.

The ruling further helped clear doubts regarding the Affordable Care Act (or ACA), and the government has now directed its attention toward Medicaid expansion. As more states are expected to expand their eligibility criteria for individuals to become Medicaid enrollees, Medicaid is expected to be a major driving force in the health insurance industry.

Centene aims to position itself as a leader in this fast-growing Medicaid market. Health Net’s acquisition will add about 1.7 million Medicaid members to the company’s portfolio, which should help the company take advantage of future Medicaid expansion programs.

Diversification

In addition to the Medicaid business, the Centene–Health Net deal is also expected to help Centene (CNC) diversify its revenue base and lower its over-reliance on the Medicaid business. Health Net’s acquisition will add ~275,000 members to Centene’s Medicare Advantage segment.

Health Net will also add 2.8 million people to Centene’s customer portfolio from additional government programs, such as TRICARE for current and retired US military personnel and their dependents, as well as Veteran Affairs for military veterans.

Investors can also achieve diversification in their healthcare portfolios by investing in the iShares Dow Jones US Healthcare ETF (IYH). In addition to other major healthcare stocks, Centene and Health Net also account for 0.29% and 0.18% of IYH’s fund value, respectively.

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