August 6, 2018, 4:00 AM
CDT
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David Cotton and family
sold Meridian for $2.5 billion in cash
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Affordable Care Act brought
insurers millions of new customers
Catering
to Detroit and Chicago’s poor has made the Cottons rich.
David
Cotton and his family spent two decades building Meridian Health Plans into the
biggest private provider of Medicaid benefits in Michigan and Illinois. It
serves about 1.1 million members, with more than $4.3 billion of revenue forecast for 2018.
Now
they’re cashing out. WellCare Health Plans Inc. announced in May that it’s
buying Meridian for $2.5 billion, a deal that includes two state insurance
businesses and a pharmacy benefits manager.
Cotton,
67, his wife Shery, and their three sons own the entire company, according to
filings. The sale is expected to be completed by year-end and would leave the
family with about $2 billion after taxes, according to the Bloomberg Billionaires Index. That puts them in the same
wealth stratosphere as Detroit’s Dan Gilbert, owner of Quicken Loans, and
Chicago’s Penny Pritzker, the Hyatt Hotels heiress.
Meridian
and the Cottons didn’t respond to requests for comment.
New Customers
The
windfall is a reflection of the nation’s burgeoning $3.3 trillion health-care
system, with Medicaid spending rising 3.9 percent to $566 billion in 2016,
according to the Centers for Medicare & Medicaid Services. It’s projected
to almost double to $996 billion over the next decade.
Two
trends are helping health insurers like Meridian. The Affordable Care Act, which
became law in 2010, spurred the expansion of Medicaid to more low-income
people, bringing insurers millions of new customers. And states have
increasingly turned over more of the responsibility for running their Medicaid
programs to private insurers. One recent estimate put the number of Medicaid
beneficiaries who get coverage from private firms at more than 54 million.
While
Meridian lost about $14 million last year, revenue more than tripled to $3.6
billion in the five years through 2017, according to data compiled by A.M.
Best. Other Medicaid-focused insurers are growing, too. Centene Corp., which
has surged almost 1,000 percent since the day then-President Barack Obama
signed the Affordable Care Act in 2010, reached a $3.75 billion deal last
year to acquire New York insurer Fidelis Care, and bought Health Net Inc. for
about $6 billion in 2016.
Long Journey
While
physicians are the highest-paid professionals in the U.S., they’re rare among
the ranks of billionaires. Molina Healthcare Inc., which offers Medicaid plans
in states including California, Florida, Texas and New York, has surged more
than 600 percent in the same period and is now worth $7.8 billion. That has
helped the founding Molina family amass a $1.3 billion fortune, according to an
analysis by the Bloomberg Billionaires Index.
The Molinas declined to comment on their wealth.
A proxy
filing shows that family members owned about 18 percent of the firm last year,
before the board ousted Chief Executive Officer J. Mario Molina, after the
physician spent two decades at the helm, and his brother, finance chief John C.
Molina, fueling speculation the insurer could be sold. Their father David
Molina started the insurer’s predecessor company in 1980.
The sale
of Meridian, meanwhile, marks the end of a 21-year journey for David Cotton, a
former chief of obstetrics and gynecology. He left to found Health Plan of
Michigan with his family in 1997. It was a family business right from the
start. The Cottons mortgaged their home, maxed out credit cards and saved on
office cleaning costs by doing it themselves, according to a 2016 profile in
DBusiness magazine.
Cotton
set out to differentiate his company by seeking to pay claims quickly. As it
added members, it started to acquire other health plans and had revenue of $275
million by 2008, DBusiness said.
It
remained a family business, with David as CEO and chairman and sons Jon and
Michael as corporate president and chief operating officer, respectively. A
third son, Sean, is president of the company’s pharmacy benefit manager,
MeridianRx.
Surprise Change
Now the
family is stepping back. They won’t remain involved with the business after the
deal is completed, according to a May 29 conference call.
That
seemed highly unlikely just a few years earlier.
“I know
that if we ever sold, nobody would take care of our members the way we do,” Jon
Cotton told DBusiness in 2016. “No one would take care of our employees the way
we do. So you know what? Why would we do it? It’s a successful business, we
make enough money, and we don’t need to sell.”
After
announcing the deal, the family said it had a change of heart in 2017 after
concluding it needed additional financing to grow and found the “ideal partner”
in WellCare.
There
will be plenty of risks for the combined firm. Medicaid is jointly funded by
states and the federal government. The Trump administration has proposed cuts
to Medicaid, though Congress appears to have little appetite to do so. The
health program is straining states’ budgets, so some are seeking to limit its
growth, such as by requiring some Medicaid beneficiaries to work or get job
training.
After the
sale, the Cotton family may have more time for that perennial billionaire
investment: real estate. They already own Meridian’s headquarters in downtown
Detroit, along with Quicken’s Gilbert.
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