Healthcare exchange traded funds defied the market's weakness
Monday on news that health-insurance giantWellPoint (
) agreed to buy outAmerigroup (
). The deal valued one of the largest players in Medicaid at $4.9
billion or about $92 a share. Amerigroup shares shot up 38% to
close at 88.79.
IShares Dow Jones U.S. Healthcare Provider (
) gapped up 2.14% to 65.02. The ETF appears to be forming a
cup-with-handle pattern with a 66.18 potential buy point.
It has a middle-of-the-road IBD Relative Strength Rating of 57
but a strong Accumulation/Distribution Rating of B-. That means
its price performance is outpacing 57% of the market and
institutions are buying more shares than selling.
IHF has 7% of its assets invested in WellPoint and 2% in
Amerigroup. Its largest holdings areUnitedHealth Group (
), accounting for 14% of assets, andExpress Scripts Holdings (
), with 12%.
The deal is estimated to save WellPoint and Amerigroup $50
million in 2013 from combined operations and up to $125 million
The buyout is set to close in the first quarter next year,
pending regulatory approval. Upon completion, WellP oint will be
the largest Medicaid managed-care provider, with 4.5 million
subscribers in 19 states.
As the largest health insurer, it covers 33.5 million members
under UniCare, Blue Cross and Blue Shield plans. UnitedHealth,
the largest-Medicaid provider currently, covers 3.6 million
Medicaid serves low-income families and some disabled people
and is jointly covered by states and the federal government.
The buyout will expand WellPoint's reach in the fast-growing
Medicaid market, analysts said.
"WellPoint has not had much success on its own in the past
when it comes to winning Medicaid contracts," Jefferies equity
analyst David Windley and his colleagues wrote in a client note.
"Amerigroup's experience in this arena should elevate this
success rate." They rated WellPoint shares as "hold."
WellPoint "recognizes the growth opportunity in the government
space, as states continue to face significant budget challenges,
while managed care is still underpenetrated," Raymond James
analysts Michael Baker and Cathy Chen wrote to clients.
"WellPoint expects spending on managed care in Medicaid to grow
by about $100 billion by the end of 2014."
Amerigroup's membership grew an average of 4% annually between
2007 and 2011 while revenues grew 13% over the same period.
Other government-sponsored healthcare program
providers,WellCare Health Plans (WCG),Molina Healthcare (MOH) and
Centene (CNC), jumped 18% to 20% on speculation they could be the
next buyout targets. Potential suitors include large, diversified
providers with a small reach in Medicaid such asAetna (AET),Cigna
(CI) andHumana (HUM), say Baker and Chen.
Medicaid managed-care providers will likely to be among the
biggest beneficiaries of the Patient Protection and Affordable
Care Act (PPACA), says David Kremp, an analyst at
Informally known as Obama-Care, the law passed in March 2010
requires adults not covered by an employer- or
government-sponsored health plan to buy insurance or pay a tax.
Kremp estimates that most of the 17 million new Medicaid
enrollees will end up in private Medicaid plans.