The Mad Dash for Medicare and Medicaid Dollars

Another competitor has entered the mad dash for more Medicare and Medicaid dollars. Major health insurer Aetna (NYS: AET) announced its plans to buy Coventry Health Care (NYS: CVH) . The cost of the acquisition is pegged at $7.3 billion, which reflects a purchase price of $42.08 per share for Coventry stockholders.

Why now?
Aetna's announcement comes on the heels of other major players engaging in acquisition deals. In July, WellPoint (NYS: WLP) disclosed its intention to buy Amerigroup. What is driving this merger activity? Insurers want bigger slices of the Medicare and Medicaid pies.

Both Aetna and WellPoint referenced expansion of their Medicare and Medicaid market presence as benefits of their respective acquisitions. Aetna stated that the deal increases its share of revenues from government business to more than 30%. That's a jump of 7% from the current level.

It's no coincidence that two major health-care acquisitions were announced this summer within weeks of each other. The June Supreme Court decision upholding much of Obamacare cleared the way for insurers to begin focusing in earnest on how to capitalize on the legislation.

One key piece of Obamacare is an expansion of Medicaid. Although the Supreme Court's decision allows states to refuse to expand their Medicaid rolls without losing federal money, several states plan to move forward with extending Medicaid benefits to more citizens.

Aetna undoubtedly sees the acquisition of Coventry as a way to reap financial benefits from this impending growth in Medicaid. Over the longer term, Aetna knows that the increasing numbers of seniors eligible for Medicare should present more opportunities also. Coventry offered a relatively easy way to gain share in both markets.

What it means
One thing the Aetna/Coventry deal does not mean is that the Medicaid managed-care market will be significantly more consolidated. Based on CMS data from 2009, the combined Medicaid market share for the two companies will only be around 4%.

However, the move does position Aetna to benefit from increased government program exposure. The company projects accretive earnings per share of $0.45 in 2014 and $0.90 in 2015.

There are also ripple effects of the acquisition. CVS Caremark (NYS: CVS) currently provides pharmacy benefits management services for Aetna, while Express Scripts (NAS: ESRX) is the PBM provider for Coventry after its purchase of Medco.

Analysts at ISI Group project that CVS could gain $0.04 to $0.06 earnings per share, assuming it is the PBM company for the new Coventry block of business. Express Scripts could lose $0.07 to $0.09 in earnings per share as a result of the acquisition.

Will others join the Medicare/Medicaid mad dash? Some analysts think that prospect is unlikely. However, the continued fragmented state of the Medicaid market in particular leaves the possibility open.

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Fool contributor Keith Speights owns no shares in the stocks mentioned above. The Motley Fool owns shares of Express Scripts Holding and WellPoint. Motley Fool newsletter services have recommended buying shares of WellPoint, Express Scripts Holding, and Coventry Health Care. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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