Undaunted By Trump's ACA Threats, Centene Plans to Forge Ahead

Centene's CEO told analysts last month the Trump administration's support of invalidating the ACA shouldn't affect the health insurer's day-to-day operations and growth plan for the future.

With the Trump administration trying again to repeal and replace the Affordable Care Act, you'd think Centene CEO Michael Niedorff would consider growing the health insurer's business away from government-sponsored healthcare coverage.

Fitch Ratings, for example, warned in its March 29 key rating sensitivities of "legislative developments that present material risks to the sustainability of current government-funded business lines to which Centene is exposed" after Centene disclosed plans to buy WellCare Health Plans, another health insurer with a large government business for more than $15 billion. 

But the CEO of Centene called news about the so-called end of the ACA "headline volatility" that shouldn't affect the health insurer's day-to-day operations and growth plan for the future, he told analysts March 27, the morning of Centene's announcement it was buying WellCare. 

"I think we all realize in the world in which we are living today there are different kinds of volatility," Neidorff said. "There are those based on earnings and results. There is volatility based on some very real things. And there is headline volatility."

Despite industry volatility, Centene's fourth quarter earnings grew steadily. Centene's adjusted earnings rose 67% to $290 million, according to the February 5 earnings report, compared to $173 million in the fourth quarter of 2017. Centene's total revenues rose nearly 30% to $16.6 billion due, in part, to the growth in individual coverage under the ACA as well as last year's acquisition of Fidelis Care, a health plan that operates statewide in New York. 

"Our marketplace business continued to perform well," Neidorff said on the fourth quarter earnings call. "There continues to be consistent demand for affordable high-quality healthcare."

ACA court decision
 

The White House said in March through its Justice Department attorneys that it supports U.S. District Court Judge Reed O'Connor's December 2018 decision invalidating the entire ACA in Texas vs. the United States.

But Neidorff seemed to be taking the decision all in stride even after Centene announced plans to buy WellCare. 

"At any given time, there’s going to be issues out there," Neidorff told analysts on March 27.

But with the Texas case now in the U.S. Fifth Circuit Court of Appeals, the case is potentially one step closer to damaging a large and growing portion of Centene's business given Centene manages Medicaid benefits for more than 8 million lives and provides individual coverage on the ACA’s public exchanges in 20 states for nearly 2 million Americans. Centene says its ACA individual business is 20% of the U.S. market for such coverage.

In the meantime, Centene said it has no plans to divert from its strategy to grow its government health insurance businesses.

"We have always maintained: 'Base your decisions … on the facts as they are known today,' " Neidorff told analysts.  "There are times when we were expanding on the marketplaces and people said, 'Why are you doing that now?' There was a lot of doubt."

Business as usual?
 

Neidorff's decision to maintain business-as-usual seems to have paid off as larger players including Aetna, Humana, and UnitedHealth Group exited the ACA's individual business, in part blaming an uncertain regulatory environment. But this year Centene expanded again, offering individual coverage on marketplaces in four new states.

And Centene is heading toward expansion into Medicare Advantage, the privatized version of health benefits for seniors. The addition of WellCare will give Centene more than 900,000 Medicare Advantage members.

Centene is several times smaller than UnitedHealth Group’s 5.1 million Medicare Advantage enrollees but the business now has a larger platform to expand into more markets.

Now that the Trump administration has changed the rules to allow Medicare Advantage plans to cover more supplemental benefits, one analyst says this will only add to private health insurer enrollment.

"Aside from growing nationally, the goal for many MA plans is to gain meaningful local density in a number of target states and even metropolitan statistical areas to drive to a differentiated MA offering," says Andrew Kadar, managing director and partner, healthcare services, at L.E.K. Consulting in San Francisco.

More than 22 million seniors are signed up for Medicare Advantage with projections from L.E.K Consulting showing there will be 38 million enrolled in such plans, or 50% market penetration, by the end of 2025.

Neidorff, who will lead the combined company as chair and CEO pending regulatory approval, told analysts during the Centene-WellCare announcement, "When [the merger] comes together, we will be in a stronger position no matter what happens."

Neidorff continued, "We have to look at the practical, the political. And everything I saw said [to me]: "This is a great transaction. It puts two great companies together in a very meaningful way, serving a lot of audiences that you can never do enough to serve. This really will prove to be a very successful and serious transaction."

Although Neidorff seems optimistic about furthering Centene's ACA business, one analyst instead sees the WellCare transaction as a way to grow in other areas with less risk.

"We see this as a way for Centene to drive margin expansion and accelerate growth, while also diversifying against policy risk with the ACA including the TX Court decision," SVBLeerink analyst Ana Gupte, PhD, wrote in a March 27 report.