By ANDY MYCHKOVSKY

I feel like the healthcare world just skipped over the $17.3 billion mega-merger between Centene and Wellcare, which just received final regulatory approval last Wednesday. With their powers combined, this new company will create the Thanos of government-focused health plans, hopefully without any of the deranged plans to take over the world. I do get it, 181 million lives are covered by employer-sponsored insurance, between full-risk and self-insured plans. These employer populations have the most disposable income and their HR departments are willing to provide supplemental benefits. However, in my opinion, the future growth of health insurance will be governmental programs like Medicare Advantage (MA), Medicaid managed care, and ACA exchanges. But instead of me telling you this, here is exactly what Centene and WellCare said in a press release to defend the merger:

“The combined company would be the leader in government-sponsored healthcare with increased scale and diversification both geographically and in its managed care service offerings, and enhance access to high-quality services for members. It will offer affordable and high-quality products to its more than 12 million Medicaid and approximately 5 million Medicare members (including Medicare Prescription Drug Plan), as well as individuals served in the Health Insurance Marketplace and the TRICARE program. The combined company will operate 31 NCQA accredited health plans across the country and will have increased exposure to government-sponsored healthcare solutions through WellCare’s Medicare Advantage and Medicare Prescription Drug Plans. It will also benefit from leveraging Centene’s growing position in the Health Insurance Marketplace to new markets. The transaction creates a company with the size and scale to better serve members through enhanced healthcare programs, expanded capabilities and increased investment in technology.”

Simply put, here’s some of quick stats provided at the JP Morgan Healthcare Conference presentation on January 13, 2020:

• National footprint now serving 1 in 15 Americans
• Clear market leader in Medicaid managed care and ACA exchange marketplace
• Dominance serving most complex populations, #1 leader in LTSS and #2 in dual eligible
• Competitiveness in the Medicare Advantage (MA) enrollment wars
• $500 million in proposed savings due to annual cost synergies

Announced back in March 2019, some investor analysts questioned the merger given the significant overlap between each plan’s enrollment and focus on governmental programs. Turns out, in some states, the combined entity would have monopolistic tendencies. Therefore, in order to satisfy anti-competitive market dominance, WellCare must divest its Medicaid and Medicare Advantage plans in Missouri, Medicaid plan in Nebraska, while Centene must divest its Medicaid and Medicare Advantage plans in Illinois. So long as they comply with these specific requests, you have yourselves a ballgame folks.

I’m actually a bit shocked these few divestitures is all that is required given their combined business. For example, Florida is the 4^thlargest Medicaid state in the country. This is also where WellCare is headquartered and holds the largest Medicaid managed care enrollment in the state. The combined market share between Centene and WellCare nears 46% as of December 2019 enrollment reports for the traditional Managed Medical Assistance (MMA) population (e.g., TANF, SSI, ABD) with over 2.7 million lives. Now Florida did just finish their open enrollment period in January, so there is potential that the two plan’s enrollment could’ve changed by now. However, I find it difficult to believe their enrollment would change too significantly given the relatively low open enrollment churn rates in Medicaid.

Why does this all matter? Because Medicare covers 61.2 million Americans and Medicaid covers 75.8 million Americans. That represents 137 million total lives between the two major lines of business that Centene and WellCare focus on. Add in the 8.3 million from the 2020 ACA exchanges and that is just icing on top of the cake for next decade’s growth opportunity. We have a baby boomer population (ages 52 to 70) that numbers 74 million and beginning to age into Medicare. These are the highest cost population segment, excluding some of the smaller specialty populations (e.g. PACE), that must be managed by either Medicare fee-for-service (FFS) or Medicare Advantage plans.

Let’s start with MA. I wrote an entire blog last week on the MA market, particularly from the perspective of the startup health plan. To recap, the battle for MA is hard. The sales and marketing expenses for subscale plans is high due to broker fees for initial enrollments and renewals. The plan must be old enough with good quality to receive a high Medicare STAR quality rating, which in turn requires the federal government to provide bonus payments to the MA plan that can be used to offer patient’s supplemental benefits. Given the high medical cost of MA patients, $800-1,000 per member per month (PMPM), small plans are subject to actuarial risk and higher outlier expenditures that can sink your plan’s medical loss ratio (MLR).

Let’s take Duval County, Florida, home of the Jacksonville Jaguars and 180,000 Medicare eligible beneficiaries and 70,000 MA lives (39% MA penetration rate). In this particular MA market, Centene and WellCare account for 17% of the total MA lives (~12,000 lives), trailing only UnitedHealthcare (32%) and Humana (19%). This merger nearly triples Centene’s existing MA enrollment and places them in a much better position to compete against the major for-profit incumbent and startup plans. They will still only account for 3.6% of the total MA market, but appear focused on targeting this older customer base and will benefit from the broader trends from FFS to private plans. All-in-all, Centene and WellCare have a combined 875,000 lives across 455 MA plan options as of January 2020.

Now let’s switch to Medicaid. The worst kept secret in healthcare is that Medicaid (not Medicare) is the primary payer of long-term services and support (LTSS) like nursing homes in America. If we’re projecting forward, where do you think the 74 million baby boomers are likely to reside as they age? With a shortage of qualified home health aides (not to mention how expensive out-of-pocket it can be), limited societal buy-in for multi-generational housing (compared to Asian countries), and younger generations receding to expensive, urban areas, Houston we have a problem. Not to make matters worse, but the only way for your loved one to receive Medicaid benefits to cover nursing home care, is if they’ve already used up most their savings and assets. Once they’ve hit that financial point of no return, it is unlikely your loved one will be able to afford anything else beyond the nursing home that accepts their Medicaid coverage.

In terms of growth opportunities, I mentioned in a previous Heathcare Pizza blog that majority of states have already transitioned into Medicaid managed care. Most states contract with payers like Centene or WellCare to administer the program for a portion of patients in return for a set per PMPM fee. This fee is set by third-party actuarial firms and includes the desired medical loss ratio (MLR), administrative loss ratio (ALR), and profit margin built in. The way you win a coveted contract award is by applying during a competitive request for proposal (RFP) period that typically happens every few years. Centene already has a strong 5-year Medicaid RFP win rate of 80%, and adding WellCare will only bolster their chances. With North Carolina scheduled to move into managed care in 2020, of which both Centene and WellCare were awarded separate contracts, the game is less about net new states but instead focused on transitioning all populations into managed care.

For example, the state of Arkansas is currently undergoing a process to transition their Medicaid populations into managed care via the Provider-led Arkansas Shared Savings Entities (PASSE) program. The state chose to start with the most complicated and expensive population, the ~45,000 intellectually and developmentally disabled (I/DD) patients. They started here because these patients alone cost Arkansas Medicaid over $1 billion annually. However, there are 926,000 Medicaid lives in the state as of December 2019. If you don’t think health plans like Centene see the potential opportunity to convert the remaining members into their managed care enrollment, you’re being naïve.

Up to 24 million lives will be covered by this newly merged entity, forming a formidable opponent to the dominant for-profit health plans like UnitedHealth Group and CVS / Aetna. If their go-to-market roadmap is successful, I see good things for employees and investors related to the company in the near future. That is not financial advice, just one man’s opinion. I will tell you one thing though, the market seems to have come full circle because since October 2019, the stock has been on a steady rise in preparation for the merger approval.

Andy Mychkovsky is the creator of Healthcare Pizza, where this post originally appeared. Follow him on Twitter (@AMychkovsky) and LinkedIn for future thoughts and updates.