Navigating Health Plan M&A: Strategies For Success In The Medicare Advantage Market (Podcast)

On this Ropes & Gray podcast, health care partners Ben Wilson and Mike McGrath discuss the current trends and challenges in health plan mergers and acquisitions, with a focus on the Medicare Advantage market. They explore the factors driving deal activity, such as financial distress among smaller plans and strategic partnerships for growth, as well as evolving federal and state regulatory requirements. The conversation provides practical guidance for health plan leaders on maximizing value, preparing for regulatory approvals, and addressing nonfinancial considerations like star ratings and compliance history when pursuing M&A opportunities.

Transcript:

Ben Wilson: Hello, and welcome to another Ropes & Gray healthcare podcast, where today we will be taking a look at mergers and acquisitions in the Medicare Advantage market. My name is Ben Wilson. I'm a partner in Ropes & Gray's health care group. With me today is Mike McGrath. Mike is a fellow partner in the health care group, who I know has been deep in the trenches of MA M&A the past few years. Hi Mike. Welcome to the podcast.

Mike McGrath: Hey, Ben. Thanks for having me on.

Ben Wilson: So, Mike, give us an overview of the health plan M&A landscape, particularly when it comes to deals involving Medicare Advantage plans, dual eligibles, special needs plans, and the like. Where have we been? Where are we now? And where do you see the market going in the next few years?

Mike McGrath: Sure. Happy to. We've seen a bare bit of activity in the health plan M&A space, I'd say in particular starting maybe right before the pandemic, so five or six years ago up until the present. There are two types of transactions that really jump out as being the two types that tend to come across our desks.

First off, it's smaller, more regional plans, sometimes with very few members—we're talking 1,000, 2,000 members, particularly for, you know, certain D-SNPs and specialty Medicaid, Medicare type products—that have really encountered financial distress. And they are coming together with larger or more mid-size regional plans, with those larger or more mid-size plans really coming in just to purchase the membership at the end of the day.

Those smaller plans are just not able to make a go of it anymore. The cost structure just doesn't really work for them. Typically, a lot of those plans will have been somehow provider-generated, so those will be plans that were started maybe in the early 2000s, 2010s by providers that kind of fit a specific need, but the market kind of just went past them.

And then the other set of transactions that we are seeing are more strategic in nature. So oftentimes, they are kind of more regional players that tend to be quite healthy from a financial perspective. But for reasons of either needing greater scale or kind of being boxed out and boxed into a particular market and not having the ability to expand, they are looking to partner with other plans either of similar size in congruent markets or potentially, you know, larger national players who can come in and really help them with their scope.

Sometimes, those transactions are driven because an ultimate parent entity is—sometimes a provider as well is—looking for cash. So, a few transactions I've done recently, we've had more of these pretty stable-to-profitable health plans grown out of a provider structure, be it a nursing home, a hospital or health system. That nursing home, that health system is in some level of distress, and as a result, they are looking to sell their provider in order to generate cash.

I think on a go-forward basis, you are likely to see more of the former. The pressures coming out of both Washington and at the state level I think are likely to push plans into more financial distress, particularly ones that tend to be a little more on the Medicaid side, given the new provisions in the Big Beautiful Bill that are really going to stress state budgets and availability of funds for MCOs, as well as the enforcement landscape on the MA side. Particularly notably with the RADV audits coming down the line, we've seen a lot of clients who are preparing for some real negative returns, particularly in 2026 and 2027.

Ben Wilson: That's very interesting, Mike. And it sounds like we've seen a lot of financial distress and more financial distress coming in this market. It sounds like you've sort of seen deals change accordingly. Say I'm a leader in an acquisitive health plan looking to grow through acquisitions. In this market, what makes a target particularly attractive? And how is that different to, say, five years ago when we saw less financial distress?

Mike McGrath: I think that's a great question, and something we are seeing fairly often, Ben, now that we have those pressures that I just alluded to on the regulatory side of things,is there is going to be an increasing number of government plans, particularly at kind of the mid-size, regional, and small plan level that are going to be facing this ever-growing pressure on their bottom line as a result of kind of just the reduction in funds that are available, as well as some of the enforcement actions that are coming up the pipeline from CMS's perspective in particular.

So those plans are going to be looking for a lifeline, right? And for other market participants that are out there and are taking a somewhat long view of the sector and see themselves as staying around for a good period of time, this is a buyer's market for them, right. There is going to be opportunity out there, and it is really not for the squeamish, right, because there's probably not a lot of new entrants, completely new to the market, raising their hand to say, "I want to get into, you know, Medicaid managed care or Medicare Advantage plans," at this current moment in time.

But for, you know, folks who are already kind of in it, this is a good opportunity to really grow in scale, grow in membership size through M&A, through acquisition, through strategic partnership. And so I think there's going to be a lot of opportunity out there.

One other point I'd want to raise is something we've seen growing over the past few years. Is plans really looking to what is their kind of market advantage in an M&A capacity. And we've seen a growth of some more regional and national players that are actually nonprofit-based.

So typically, historically, you've seen the blues. You've seen small, usually state-level health plans, that tend to be nonprofit. They tend to have been formed from providers. However, there have been a number now, of more regional-to-national players out there that have seen a nonprofit status as being a particular strategic advantage, particularly in the M&A market, because it opens up vastly the deal structure that can be accomplished when entering into some sort of affiliation with another nonprofit plan. Whereas a for-profit, large national plan largely has to acquire through, you know, asset acquisition at the end of the day or establishment of kind of a wholly new for-profit entity.

Nonprofits can kind of come into other nonprofit plans, and really just pick them up, bring them under their network, and move forward from there. So that benefit is really, it cuts down majorly the amount of regulatory approval and red tape that needs to be moved through, both at the state level but also on the CMS side.

You may not have to novate a contract. You may be able to kind of just step in the shoes of the prior owner and move forward. So that is something that we've seen a growth of over the past five years. And I think that trend is just going to continue.

Ben Wilson: Let's flip the question and get tactical then. Let's say I'm a health plan. I'm looking to sell a line of business or one of my plans. So really, tactically, what are the most important things I can do in the months before going to market to maximize value, ensure a smoother process? You've talked a lot about regulatory timing and regulatory approvals. Tell us a little bit more of that from the sell side.

Mike McGrath: I think the first thing that you should do, assuming that you are not a plan who is every, you know, month or at least multiple times a year kind of in the market engaging in M&A transactions, is really look for and hire a good consultant, financial advisor, or banker who has real experience, particularly in the government program market M&A space.

There's a number of them out there, and I do think there is a lot of value to be provided just because they have seen a lot, just as Ropes & Gray and outside legal advisors have seen a lot as well. And so really building a good team that includes both banking, financial advisor, and legal counsel is going to allow you to maximize any sort of bids that you ultimately get in for the line of business or the totality of your businesses, if that's what you're looking to sell.

I would then say, get your arms around the necessary regulatory approvals for the transfer much earlier than you think you might need to. And the reason for that is because there are a number of approvals with some foresight and planning can make for on the back end a much, much simpler and straightforward transaction.

I'll give one example. So if you have any sort of CMS, Medicare Advantage, D-SNP-H contract, and you are looking to engage in a transaction that is going to require some level of novation, that is going to then create a number of issues around who is the potential acquirer and what does their suite of Medicare H contracts and service areas look like?

And so, particularly if you have one or two or a certain number of potential market, in market, or adjacent market buyers in mind, there is work that can be done to ensure that you have the most overlap as possible,and so that you are making that H contract novation as obtainable as early as possible in the process, because sometimes that can be the very long end of the pole, as far as being able to accomplish, you know, a deal or a transaction,because CMS tends to move only on a January 1 basis, and if they do do an off-cycle novation, it's likely only with kind of a perfect set of complimentary plans and products and benefit packages at an acquiring plan. So thinking critically about that early on is going to be, you know, to your benefit as a potential sell side plan.

And then lastly, I would say that if you have a mindset that at some point —even if it's not in the next six months, if it's in the next few years —that, you know, some sort of transaction might be in your future, start to bake into your provider agreements in particular, but any sort of vendor arrangements that you might have as well, as sell-side favorable language as possible, particularly around assignment and change of control. Because oftentimes kind of a baseline payer provider contract will have generic assignment language that prohibits assignments without consent of the other party. And oftentimes, if we run into a transaction structure where a contractual assignment is necessary, or if it has change of control language, a change of control occurs, you are giving potentially providers or important vendors very significant rights to approve a transaction where they can either say no altogether, or more likely they can take a pound of flesh, right, as part of that transaction.

So a little foresight into that contracting is going to go a long way for making things smoother after you've signed, you know, some sort of binding, definitive agreement with a counter party.

Ben Wilson: That's great. I think you're getting at some of the nonfinancial drivers of value in a transaction —ways to create value or at least remove value detractors. Are there other nonfinancial drivers of value in these that you've seen that senior leaders should be aware of when assessing a government program plan target in particular?

Mike McGrath: Yeah. I think there's a few. So for Medicare plans, I'll start with those, having a good sense of what the plans, either assuming you're buy-side, what the acquired plan's star ratings look like and really getting a sense of what the impact of their star ratings, the transaction structure in your star ratings, are going to do. I mean, that can have a significant go forward impact on bottom line revenue coming into the plan, nd often something that's not one of the initial points focused on, and it really should be, particularly on the business end in order to ensure that you're not really stepping in it. You're not acquiring a plan that come to find out is going in the wrong direction and the historic revenues are not going to be what the future-looking revenues are going to be generated as a result of it.

Similarly, one of the things that has become more of a focus as part of the diligence is whether or not the target plan has generated Medicare compliance points as a result of compliance action. And these noncompliance points, you know, if you reach a certain threshold, can have significant effects on any MA plan's ability to expand within its market or even offer its similar H contract on a go-forward basis. So another thing we have seen is, folks get fairly far down the skids of diligencing a plan, only to come to find out that part of the basis for the transaction was to do a major service area expansion and prior noncompliance issues with the target plan has really put them into a situation where per, you know, CMS regs—absent an exception that is not particularly forthcoming —they are kind of boxed out for a period of time from being able to expand service areas. And that can have a major negative impact on the business that's not otherwise obvious.

Similarly, on the kind of non-Medicare side, particularly if you're new to a particular state or a market, engaging (and this goes back to the point about hiring a good consultant) but really engaging advisors who have deep experience in that market.

You may be a very sophisticated operator of health plans, of Medicaid, managed care products in specific geographies. However, every state that we've encountered, it has some quirk to it, some of them extreme quirks. Right? So you have a new entrant coming into the market who thinks they know what it takes to run a plan... Come to find out that there are some unique aspects like unique encounter data, audit protocols, or even kind of changes to rate methodology occurring on a bit of a non-linear, topsy-turvy basis that really impacts the ultimate bottom line and it's something that the acquirer was a little blind to, because they didn't do the due diligence necessary before entering the market or have the right people in place that really could have targeted for them those risks in the market. I think that's a really big lesson learned, that a few folks will have said, you know, "We wish we had done that little bit of homework and it would have saved us a lot of headache on the back end."

Ben Wilson: Yeah. Speaking about state quirks, we've done a lot of thinking and speaking lately about the new wave of state healthcare transaction laws. Some are requiring AG or other state agency review and approval. Some also focus on health plan transactions. What's one piece of advice you give a leadership team to best prepare them for navigating those particular approvals smoothly?

Mike McGrath: I would say, it is a balance, but really engaging the relevant regulators as early as practicable. Now, oftentimes you can't out of the gun go out and talk to them about a deal due to confidentiality, et cetera. But particularly on the sell side, if there is a level of financial distress, your state insurance regulator or health department is going to know about that, right, necessarily given all of the financial reporting that's going in there. So you're probably already having conversations with them, and one of those conversations may be around M&A as a strategy, in order to ensure that whatever the bottom line financial problem is solved and that there isn't member disruption.

So having those conversations with regulators, even if it's in, you know, kind of not in a nonspecific way, to get guidance on process and to get guidance on, you know, what is the best way to go about doing something as efficiently as possible, is always going to pay dividends.

You can read underlying statutes. You can read the regulations. You can know what they say. But until you really talk to the person who is going to be in charge of overseeing the process and has gone through the process before, it's very likely that you're going to encounter unforeseen speed bumps. And the regulation is, maybe 50% of the time, what it takes to get something over the finish line, and there's going to be nonregulatory, subregulatory issues that are going to pop up that, you know, may be unforeseen, that you can address early on by engaging the necessary regulatory entities as early as possible. And that goes, Ben, you know, in particular, to these new state transaction laws we've seen.

Oftentimes, or at least over the next year or two, some of these transactions, particularly these managed care transactions, might be an issue of first impression under some of these new state transaction laws. So, engaging the relevant regulators, particularly through an advocacy lens and a lens that says, "Hey, you know, we're already regulated by...[list it out, right, state insurance regulatory, state health department, state attorney general.] We have to go through these regulatory approval processes already. Is it really necessary to also go through this new regime? Or can we read, right, this exception that there may be some gray, in order to allow us to avoid having to go through yet another layer of regulatory approval?" Or if the answer to that question is no, at least knowing, right, what it is going to take to get through that process and be ready to, you know, hit the ground running when the time is right.

Ben Wilson: Those are really great insights. Okay, last question. What do you think is the first thing that CEOs should ask themselves before even thinking about an acquisition or sale of an MA, Medicaid, or Duals plan?

Mike McGrath: Why? I think the "why" question is often left out. And that may seem a little counterintuitive. But, I cannot tell you the amount of times we have seen, sell side clients in particular, that are presented with a strategic acquisition because, particularly in a financial distress situation, you have a market participant or an adjacent market participant who says, you know, "We need a lifeline." Right? Targets a very select amount of potential buyers out there. That potential sell side plan gets outreach and gets very excited about the prospect of, you know, engaging in a deal, growing for the sake of growth, without really stopping to assess the opportunity and, in particular, the value that it can bring to their business.

I think in the financial distress world in particular, financially distressed plans are distressed because there has been some level of structural challenges to their business model, most of which can't just be fixed overnight. So the question I would be [asking] as a CEO is, "Well, why are these folks talking to me? And what are the issues driving that conversation? Why do they need to be reaching out to us in the first place? And what should we be wary of in engaging in the conversation and going down the path of spending management time, expense of bringing in these outside advisors, you know, expense of just putting the company's focus on this potential transaction?"

You know, really having a good value proposition for it and really seeing what the rationale for the deal is beyond just doing a deal and beyond potentially even getting a deal at a very attractive price because of the financial distress there.

Price in and of itself is not the only equation. If there are structural issues that the plan is projecting ongoing losses under, that could be a problem. If they know that under the hood, there are a number of potential unknown liabilities that are just waiting and you don't do the necessary due diligence to look at those or don't get the necessary indemnity, be it from the plan itself or potentially from state regulators if they are really the ones who are pushing for a transaction to minimize membership disruption at the end of the day. All of that needs to be weighed and needs to be weighed appropriately.

And that is not to say, don't do, you know, an M&A deal. We've seen a ton of very successful ones that have driven ultimate growth, that have driven companies into additional markets and allowed some fairly aggressive expansion. But just be thoughtful about it. I think that is the top advice that I would give at the C-suite level back to companies.

Ben Wilson: Thanks again, Mike. You've given us a good sense of the opportunities that are out there, as well as some really practical suggestions for pursuing them. I'll just say it. It sounds like there are plenty of traps for the unwary here. If you're contemplating a deal in the health plan space, pick up the phone and call Mike or your usual advisors to be sure you have a good guide along the way.

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