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WellPoint's Deal for Amerigroup Is Landmark 'Obamacare' Merger

Already, some companies have used recent mergers to position themselves for key earnings opportunities, amid the prospect that profit margins fall throughout the healthcare sector.

"There is a very basic level of consolidation that is taking place," said Marc Cabrera, head of the healthc are investment banking practice at Morgan Joseph TriArtisan, of widespread health care sector M&A efforts, in a late June interview that came before the court's ruling.

Cabrera highlighted a consistent drum of mergers among physician practices, hospitals and pharmacy benefits managers as indicative of the needs for companies in the health care sector to grow their scale in the face of margin pressures.

Some companies thought to be most impacted by Obamacare and the Supreme Court's decision have already scaled into new business lines. Last October, Cigna (CI) bought HealthSpring (HS), a health care provider with a big pharmacy unit, in a near doubling of its PBM unit.

In late June, the court confirmed the Act's ability to force Americans to carry health insurance and compel insurers to cover people with pre-existing health conditions. The Supreme Court, however, limited the extension of Medicaid, deeming it unconstitutional for the federal government to withhold money from states that don't comply with the Act.

The Supreme Court's maintenance of the Affordable Care Act signals that Medicaid will expanded to some extent -- with the biggest impact to Medicaid HMOs like Amerigroup, Molina (MOH) and Centene (CNC).

Nevertheless, for companies tied to health care plans subsidized by Medicaid and other government programs or unsubsidized private market plans for corporations and individuals, Cabrera said he sees a relatively similar set of challenges to grow their scale and earnings, regardless of how the Supreme Court ruled.

Companies will be pressured to figure out a way to grow the bottom-line in a health care market that's likely to become far more cost-competitive. "We do not see that the cost trend today is sustainable, therefore to be a winner in the future you need to be bigger and have economies of scale," said Cabrera.

Recent deals like dialysis specialist DaVita's (DVA - Get Report) $4.42 billion acquisition of privately held physician practice HealthCare Partners and health-insurer Humana's (HUM) acquisition of hospital chain Concentra in 2010 highlight how health care sector players are scaling their operations, noted Cabrera.
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