WellPoint Bets On Medicare And Medicaid

| About: Anthem, Inc. (ANTM)

Health benefits/insurer WellPoint (WLP) announced it will acquire managed care provider Amerigroup (AGP) for $4.9 billion, or $92 per share in cash and debt. The deal represents a 43% premium over Amerigroup's Friday closing price. More importantly, it looks as though insurers are broadly seeking to capitalize on increased Medicare and Medicaid coverage.

Amerigroup manages benefits programs for Medicaid users in several states and has experienced strong revenue growth over the past several years. The firm currently serves over 2.7 million customers in 13 states, though that number looks to expand going forward thanks to increased state coverage. Several of the Medicaid users that will be added include those with, "… dual eligibility, seniors and persons with disabilities and long-term service and support markets."

We think this line from the firm's press release perfectly summarizes the purpose of the acquisition:

"The combined company's Medicaid footprint will include 19 states. The company will also have a presence in 13 states with significant near-term dual eligible managed care opportunities, including a presence in the four largest states that have a combined $105 billion in annual dual eligible spending."

WellPoint should be able to leverage (CUT) some SG&A expenses and benefit from increased negotiating power with hospitals. The firm has already announced that it expects the Amerigroup acquisition to be accretive to earnings in 2013 (assuming the deal closes in the first quarter) and to add at least $1 per share in earnings in 2014. Though the transaction faces regulatory approval, the current administration will likely be in favor of anything that could lower healthcare costs.

We also wouldn't be surprised to see other large insurers scoop up other Medicaid insurers, which could explain why WellCare (WCG) and Centene (CNC) have seen shares trade higher on this news. We continue to keep a close eye on the health insurance industry for potential opportunities.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.