Centene Is Health Reform In Action

  • Health Reform is about moving toward per-patient fees, away from event-driven medicine
  • Centene and HealthNet, which are merging, have both proven they can do this.
  • The resulting company will be a nice fit for a major insurer.
Centene Healthnet merger

Ever since the Affordable Care Act was signed in 2010, managed care has become an unexpected sweet spot in the stock market.

By taking swaths of patients under Medicare, Medicaid, VA or other government programs, where payment is assured, then using prevention and network control to deal with these patients profitably, insurers have been getting to the very root of the health reform issue.

The whole purpose of “Obamacare” was to move from event-driven to patient-driven payments, and government programs like Medicare are at the heart of that. So-called “Accountable Care Organizations” are given a per-patient fee, and if they keep costs below that figure they profit. This encourages regular check-ups, preventive medicine, and the use of technology. It encourages follow-ups on patients with chronic conditions like diabetes, aimed at keeping them out of the hospital.

The pre-2010 model saw doctors, and hospitals, being paid for every visit, every test, and every procedure. Doctors wound up buying into hospitals and imaging clinics, self-referring patients, driving costs up.

Centene (NYSE:CNC) and Health Net (NYSE:HNT), announced they were merging last week, are both making it in the new environment. For its most recent quarter, Centene had net income of $63 million, 52 cents per share, on revenues of $5.1 billion, compared with earnings of $33 million, 28 cents per share, and revenues of almost $3.5 billion a year earlier. HealthNet, meanwhile, had net income of $30 million, 38 cents per share, on revenue of $3.9 billion, against $29 million, 36 cents per share, and revenue of $3 billion a year earlier.

Note: You might be interested in our Centene Stock Analysis Video.

The growth is slow, profits are slim, but as scale is achieved you have a nice business. Centene’s drive to build scale is fueled by its desire to go “up the stack,” to go beyond serving Medicare and Medicaid patients, and to have individual policies through the Obamacare exchanges, through a unit called Ambetter.

That is precisely where HealthNet had been heading, according to the company’s Web site, but the company also serves military patients through TriCare and has Veterans Administration (VA) contracts. The deal is also a natural fit because most of Centene’s work is in the east, most of HealthNet’s in the west. The deal delivered a pop of 16% to HealthNet on top of the 21.6% gain they had enjoyed so far this year, and the 56% gain of 2014.

Also see: Our latest Healthnet Stock Analysis Video evaluating the company's fundamentals.

Combining the two balance sheets, the companies say, will create $150 million in synergies for the bottom line, which would mean you have a company with roughly $8.5 billion in revenue, and profits of $250 million, during the next year.

This is unlikely to be the last step in the consolidation process, which is why those who like to make money might want to buy Centene today. Owning networks of clinics and hospitals creates vertical integration and cost control for insurers, and can guarantee profits down the road. This is at the real heart of health care consolidation today.

A company that can profit on VA and Medicare patients, which are among the least-healthy cohorts in the country, with the lowest per-patient payouts, is in a great position to win private patients on the exchanges. That’s what companies like Anthem (NYSE:ANTM), Aetna (NYSE:AET), Cigna (NYSE:CI) and United Healthcare (NYSE:UNH) want– profitable wins on the exchanges.

Centene will be a tasty morsel for one of these players, and probably fairly soon.

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