Obamacare helped make this doctor a billionaire: All you need to know

The sale of David Cotton's Meridian Health is expected to be completed by year-end and would leave his family with about $2 billion after taxes

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 US, 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.