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Synergies in Centene’s Acquisition of Health Net

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Synergies

In the previous article, we focused on exploring the role that Health Net can play in positioning Centene (CNC) as a leader in the Medicaid market. Centene projects that Health Net’s acquisition will help Centene realize pre-tax synergies worth $150 million by the end of the second year after the closure of the deal.

Additionally, after the deal closes, it is expected to increase Centene’s earnings per share (or EPS) by more than 10% in the first full year and by more than 20% in the second full year.

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Negotiation power

In addition to diversifying Centene’s business, the Centene–Health Net deal is also expected to increase Centene’s bargaining power with hospitals and other healthcare providers. A health insurer with a larger number of enrollees is in a better position to negotiate for reduced pricing from hospitals and drug manufacturers.

The combined Centene–Health Net entity is expected to offer health benefits to 10.1 million people, more than double those served by Centene alone.

Cost efficiencies

Centene offers a variety of specialty services, including dental services, behavioral health services, care management services, in-home health services, and correctional healthcare services. These services are provided to state programs, correctional facilities, healthcare organizations, and employer groups as well as Centene’s customers.

Health Net also offers specialty services such as behavioral health, substance abuse, and employee assistance programs through its subsidiary, MHN. Centene and Health Net can achieve economies of scale by integrating these specialty businesses and avoiding repetitive operations.

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The Centene–Health Net deal is also expected to lower the combined entity’s administrative expenses, as both companies can reduce their marketing and selling expenses. The deal will also result in the combined entity having higher negotiating power with hospitals and drug manufacturers. This should lead to better pricing of medical services and drugs, as well as reducing medical costs. Additionally, both companies share a common technology platform. This will result in easy integration of data and processes, further streamlining the combined entity’s operations.

Complementing geographic presence

Mergers in the health insurance industry such as those between Aetna (AET) and Humana (HUM), as well as between Centene and Health Net (HNT), enable the companies to increase their dominance in common geographic markets.

The Centene–Health Net deal should result in the combined entity’s strong presence in markets such as California, Washington, and Arizona. In addition, the two companies can benefit from each other’s hospital and pharmacy networks in adjacent geographies.

The next article will give an insight into the market’s response for the Centene–Health Net deal. Investors can avoid individual stock-related risks by investing in diversified healthcare ETFs such as the iShares Dow Jones US Healthcare ETF (IYH). Combined, Centene and Health Net form about 0.47% of IYH’s fund value.

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