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WellPoint's Amerigroup Deal Marks Big Push For 'Dual' Patients

By Jon Kamp WellPoint Inc.'s (WLP) purchase of Medicaid insurer Amerigroup Corp. (AGP) catapults WellPoint deep into the chase for a huge--but potentially risky--new market covering people with costly health problems. Known as dual-eligible patients, these are more than nine million Americans who qualify for both Medicaid and Medicare because of factors like age, disability and poverty. Rather than benefiting from the double coverage, they often wind up with poorly coordinated care from the systems' different rules. The theory is that better management should lower their costs, estimated at about $300 billion today, by doing things like helping patients with chronic conditions avoid unnecessary hospital trips. "The dual-eligible expansion opportunity is tremendous and was a driving force for this transaction," said Angela Braly, WellPoint's chief executive, on a conference call Monday. By purchasing Amerigroup, WellPoint becomes the biggest Medicaid insurer by adding a fast-growing company with contracts and connections in some key states. The health-care overhaul law recently upheld by the Supreme Court created an office in the Centers for Medicare & Medicaid Services that aims to streamline the dual-eligible system. It gave grants to several states to help foster more coordinated efforts, and many other states are moving under their own power to do the same. Serving this emerging market may require the ability to carefully manage patients' health problems, the capital to launch business, and relationships within states that can be leveraged to win contracts. WellPoint built up on one front last year by purchasing CareMore, a firm that specializes in caring for seniors with special needs. Now it's adding Amerigroup, which has experience competing for--and winning--state contracts on the Medicaid front. The transaction values Amerigroup at roughly $4.46 billion, or $92 per share. "With this deal, WellPoint becomes a key player in the dual opportunities across the country," said Citigroup analyst Carl McDonald. He noted that many larger plans in the managed care industry aren't that well-positioned to compete for dual patients, despite their overall heft, because of their "relatively modest Medicaid presence." But WellPoint with Amerigroup will have about 4.5 million Medicaid members, pushing it ahead of UnitedHealth Group Inc. (UNH). A typical dual patient might be on Medicare due to age and on Medicaid because chronic health problems drained their savings, although younger patients with disabilities are also in the system. These are "among the sickest and the poorest" people covered by the government, the Kaiser Family Foundation has said. These patients can rack up significant expenses. WellPoint noted they represent about 20% of the Medicare population but 31% of costs. On the Medicaid side, they represent 15% of enrollment but 39% of costs. The company highlighted 13 states with "near-term dual eligible opportunities," including big ones like California, Texas, Florida and New York, where the combined WellPoint/Amerigroup will have a presence. Overall, the 19 states where the companies have operations comprise more than $180 billion in spending on dual patients, significantly more than half of overall U.S. spending. WellPoint is the first big managed-care firm to pull the trigger on buying a Medicaid insurer to target this opportunity, but the market clearly anticipates there could be more to follow. Shares of Centene Corp. (CNC), Molina Healthcare Inc. (MOH) and WellCare Health Plans Inc. (WCG) soared at least 17% on the news their competitor Amerigroup was being bought out. Still, some industry executives previously talked down the idea of buying Medicaid insurers because of high stock prices and tight profit margins. Humana Inc. (HUM), which has a big focus on Medicare plans but limited presence in Medicaid, has preferred to go the partnership route, for example. It already has struck up an alliance with a big Medicaid provider in Ohio and is aiming for more. The chase for the duals market also carries some risks. Insurers in Kentucky and Texas have recently run into problems where costs for new or expanded Medicaid markets were much higher than expected, exceeding premium revenue, which hurts earnings. Considering dual-eligible patients tend to have much more complicated--and expensive--problems than those often covered by traditional Medicaid plans, an unexpected cost problem could cause significant trouble. Susquehanna Financial analyst Chris Rigg believes duals are best managed inside big firms that have cushion to handle potential cost problems that flare up. "A lot more revenue equals a lot more risk" in the duals market, he said. Then again, better management of high-cost patients offers the opportunity for big savings. WellPoint is betting it has assembled the right combination of tools to get the job done. "We clearly recognize those risks," Wayne DeVeydt, WellPoint's chief financial officer, told reporters Monday. Write to Jon Kamp at jon.kamp@dowjones.com

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