Overview
The passage and subsequent judicial upholding of the Accountable Care Act (ACA) and its various governmental healthcare edicts have significantly changed the landscape and outlook across the healthcare continuum. Nowhere is this more evident than in the health insurance and managed care industry. From the essential benefit requirements, individual mandates, medical loss ratio thresholds and likely widespread expansion of the Medicaid program, managed care entities will be pressed to conform their strategy to fit this new paradigm.
In the time period ahead of the implementation of the ACA, a revealing trend has emerged that gives a solid indication of the path forward for many managed care entities. Merger and acquisition activity since the passage of the ACA legislation has accelerated at a dizzying pace. Large managed care players such as Cigna, United HealthCare and WellPoint have raised the stakes in the industry by aggressively pursuing and acquiring a medium or, in certain instances, a major competing managed care entity.
Many times, such a transaction has served to expand and fortify the larger managed care entity's membership or geographical coverage through the acquisition of a smaller health plan with builtin membership numbers. Examples of this type of transaction are seen in Cigna's acquisition of HealthSpring, United HealthCare's acquisition of XLHealth and WellPoint's acquisition of Amerigroup. In each of these transactions, the larger managed care entity acquired a smaller payer with a substantial number of members and an established geographical service area.
The other important aspect of this type of transaction, which continues to increase in frequency, is the government program component of the membership being acquired. In each of the large transactions referenced above, the acquiring company expanded its membership base in either the Medicare Advantage and/or Medicaid programs. This is indicative of the ongoing strategy held by many leading managed care companies to take advantage of the anticipated expansion of government programs as a large component of the healthcare landscape in the United States.
Insights from Transactions
Looking closer at the large transactions that have closed in the past 18 months provides clues as to the forecast for continued managed care merger and acquisition activity. The Cigna acquisition of HealthSpring, for instance, increased Cigna's Medicare Advantage membership base by approximately 340,000. This greatly expanded the geographic coverage area, as well as added to per member/per month revenues expected from the Medicare Advantage program. As a result of these factors, the transaction resulted in a purchase price of $3.8 billion ($55/share), a 37 percent premium on the stock price as of the day before the transaction announcement.
The WellPoint acquisition of Amerigroup is indicative of a transaction geared toward taking advantage of the membership race in the Medicaid program that is expected to expand due to the implementation of the ACA. The Amerigroup transaction expanded WellPoint's reach into the Medicaid and Medicare/ Medicaid dual-enrolled marketplace to 19 states, including 60 percent of the Medicaid-eligible population in those states. With this established Medicaid presence, WellPoint will be well-positioned to take advantage of any expansion in the program due to reform in the upcoming years. WellPoint has paid handsomely for this strategy, offering $92/share in the Amerigroup transaction, which represented a 43 percent premium in stock value.
Outlook for Further Activity
What these large transactions tell us is that the race is on between the leading managed care companies to gain membership and geographical advantage in the government programs of Medicare Advantage and Medicaid. The groundwork has been laid through the ACA legislation that the government will retain and expand its reach into healthcare delivery and payment in the United States. In order for managed care to thrive in this environment, there has to be a recalibration of where the managed care membership is and will be and how managed care companies can remain relevant and profitable with the new, highly restrictive regulations from reform.
Looking forward, further consolidation of managed care companies, particularly those holding government contracts with reasonable levels of membership, appears to be a wave still cresting. Investment entities, including private equity and the small-to-medium managed care entities themselves, will be looking to position their organization to take advantage of this acquisition trend and likely will serve to accelerate transaction activity over the next 18-24 months.
Integration Challenges May Serve as a Speed Bump
In the rush to obtain as much membership and service area as possible, the issue of what to do with a disparate organization once it is acquired will remain to be a challenge for the large managed care organizations involved in such a transaction. For each of the large transactions referenced above, there is an equally large integration effort required. How does the newly acquired entity fit with the existing company infrastructure? What are the system challenges? How do the existing provider and hospital networks conform with the provider contracting strategy of the company? All these questions and more may cause some mitigation to the accelerated acquisition trend that has been observed. Integration cost, paired with the premium that must be paid to execute the transaction itself, makes for a large financial commitment for even the largest managed care companies. This is something that must be considered when determining whether further acquisitions will take place or if recently closed deals will be successful.
Looking Ahead
As long as the trend of government involvement and further reform activity continue as predicted, it is likely that the market will see additional transaction activity involving managed care companies. Some of the activity may expand beyond merely acquiring membership or service areas and include the purchase of clinical care management entities, large physician practices or hospital systems. In the age of reform, all the rules have changed.
The views expressed herein are those of the author and do not necessarily represent the views of FTI Consulting, Inc. or its other professionals. (c)FTI Consulting, Inc., 2011. All rights reserved.