While physicians are thehighest-paid professionals in the U.S., they're rare among theranks of billionaires. (Photo: Shutterstock)

Catering to Detroit and Chicago's poor has made the Cottonsrich.

David Cotton and his family spent two decades building MeridianHealth Plans into the biggest private provider of Medicaid benefits in Michigan and Illinois. Itserves about 1.1 million members, with more than $4.3 billion ofrevenue 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 dealthat includes two state insurance businesses and a pharmacy benefits manager.

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Cotton, 67, his wife Shery, and their three sons own the entirecompany, according to filings. The sale is expected to be completedby year-end and would leave the family with about $2 billion aftertaxes, according to the Bloomberg Billionaires Index. That putsthem in the same wealth stratosphere as Detroit's Dan Gilbert,owner of Quicken Loans, and Chicago's Penny Pritzker, the HyattHotels heiress.

Meridian and the Cottons didn't respond to requests forcomment.

New customers

The windfall is a reflection of the nation's burgeoning $3.3trillion health-care system, with Medicaid spending rising 3.9percent to $566 billion in 2016, according to the Centers forMedicare & Medicaid Services. It's projected to almost doubleto $996 billion over the next decade.

Two trends are helping health insurers like Meridian. TheAffordable Care Act, which became law in 2010, spurred theexpansion of Medicaid to more low-income people, bringing insurersmillions of new customers. And states have increasingly turned overmore of the responsibility for running their Medicaid programs toprivate insurers. One recent estimate put the number of Medicaidbeneficiaries who get coverage from private firms at more than 54million.

While Meridian lost about $14 million last year, revenue morethan tripled to $3.6 billion in the five years through 2017,according to data compiled by A.M. Best. Other Medicaid-focusedinsurers are growing, too. Centene Corp., which has surged almost1,000 percent since the day then-President Barack Obama signed theAffordable Care Act in 2010, reached a $3.75 billion deal last yearto acquire New York insurer Fidelis Care, and bought Health NetInc. 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 HealthcareInc., which offers Medicaid plans in states including California,Florida, Texas and New York, has surged more than 600 percent inthe same period and is now worth $7.8 billion. That has helped thefounding Molina family amass a $1.3 billion fortune, according toan analysis by the Bloomberg Billionaires Index. The Molinasdeclined to comment on their wealth.

A proxy filing shows that family members owned about 18 percentof the firm last year, before the board ousted Chief ExecutiveOfficer J. Mario Molina, after the physician spent two decades atthe helm, and his brother, finance chief John C. Molina, fuelingspeculation the insurer could be sold. Their father David Molinastarted the insurer's predecessor company in 1980.

The sale of Meridian, meanwhile, marks the end of a 21-yearjourney for David Cotton, a former chief of obstetrics andgynecology. He left to found Health Plan of Michigan with hisfamily in 1997. It was a family business right from the start. TheCottons mortgaged their home, maxed out credit cards and saved onoffice cleaning costs by doing it themselves, according to a 2016profile in DBusiness magazine.

Cotton set out to differentiate his company by seeking to payclaims quickly. As it added members, it started to acquire otherhealth plans and had revenue of $275 million by 2008, DBusinesssaid.

It remained a family business, with David as CEO and chairmanand sons Jon and Michael as corporate president and chief operatingofficer, respectively. A third son, Sean, is president of thecompany's pharmacy benefit manager, MeridianRx.

Surprise change

Now the family is stepping back. They won't remain involved withthe business after the deal is completed, according to a May 29conference call.

That seemed highly unlikely just a few years earlier.

“I know that if we ever sold, nobody would take care of ourmembers the way we do,” Jon Cotton told DBusiness in 2016. “No onewould 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 enoughmoney, and we don't need to sell.”

After announcing the deal, the family said it had a change ofheart in 2017 after concluding it needed additional financing togrow and found the “ideal partner” in WellCare.

There will be plenty of risks for the combined firm. Medicaid isjointly funded by states and the federal government. The Trumpadministration has proposed cuts to Medicaid, though Congressappears to have little appetite to do so. The health program isstraining states' budgets, so some are seeking to limit its growth,such as by requiring some Medicaid beneficiaries to work or get jobtraining.

After the sale, the Cotton family may have more time for thatperennial billionaire investment: real estate. They already ownMeridian's headquarters in downtown Detroit, along with Quicken'sGilbert.

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