Centene and Health Net merger closer to approval

Corporate headquarters of insurer Health Net Inc. in Woodland Hills, California.
Anne Cusack | Los Angeles Times | Getty Images
Corporate headquarters of insurer Health Net Inc. in Woodland Hills, California.

Shares of health insurer Centene gained more than 4 percent after the firm announced it had received approval for its $6.3 billion acquisition of Health Net from health insurance officials at the California Department of Managed Health Care (DHMC), one of two regulatory agencies in the state needed to sign off on the deal.

"We think the approval from the DMHC reflects significant momentum in the regulatory approval process," said Susquehanna analyst Chris Rigg in a research note to clients. He said key concessions the firms offered for approval, included maintaining Health Net's operations and headquarters in the state, and investing more than $300 million in programs and infrastructure to improve health care for low-income Californians.

"We believe the conditions imposed by the DMHC are in line with the companies' expectations," Rigg said.

Final approval of Centene and Health Net's merger now rests with the California Department of Insurance (DOI). The department of justice signed off on the deal last August, terminating its antitrust review early.

"Centene and Health Net expect to close the transaction shortly after receipt of approval from the California Department of Insurance, subject to satisfaction or waiver of the closing conditions," the two firms said in a press release announcing the deal.

Leerink analyst Ana Gupte says approval from the health insurance regulators could pressure the DOI to approve the deal soon. She says approval stipulations will likely include expansion of the combined firm's insurance offerings in the state.

"They will probably tell them to 'you need to be in exchanges for a period of time' — maybe even something on rate increases on the commercial market. Divestitures don't really play into it, because Health Net and Centene don't have any overlap in California," Gupte said.

Centene's acquisition of Health Net is the smallest three health insurance mergers announced last summer. The two larger mergers, Aetna's $37 billion deal to acquire Humana and Anthem's $54 billion agreement to buy Cigna, remain under review in California and analysts say those deals will likely garner greater antitrust scrutiny on both the state and federal levels.

"I think Anthem and Aetna are being viewed simultaneously by the DOJ and the state regulators," said Gupte, because of the potential impact on competition in the commercial and Medicare Advantage markets.

Centene had hoped to close its acquisition of Health Net by the end of March. Depending on when California's DOI issues its decision, the deal is now more likely to happen in the second quarter.