Healthcare giants catch merger bug

The search by the big­gest U.S. in­sur­ers for merger part­ners reaches a fever pitch.

Los Angeles Times - - BUSINESS - By Chad Ter­hune

The na­tion’s big­gest health in­sur­ers are speed­dat­ing one another, search­ing for a part­ner wor­thy of a multi­bil­lion-dol­lar merger.

An­them Inc. and other in­dus­try giants are flush with cash and ea­ger to swal­low up com­peti­tors as they in­creas­ingly vie for in­di­vid­ual cus­tomers on Oba­macare ex­changes and gov­ern­ment busi­ness tied to Medi­care and Med­i­caid.

As a re­sult, em­ploy­ers and con­sumers may be left with fewer choices and lit­tle re­lief from ever-ris­ing med­i­cal costs, ex­perts say.

The deal chat­ter started last month with re­ports of Hu­mana Inc. at­tract­ing in­ter­est from An­them, Aetna Inc. and Cigna Corp. The smaller Hu­mana is prized for its strong pres­ence in Medi­care Ad­van­tage plans, a grow­ing mar­ket as baby boomers re­tire.

Then the merger frenzy hit a fever pitch this week with news that An­them made a bid for Cigna, the fifth-largest health in­surer by en­roll­ment. Not to be counted out, in­dus­try leader Unit­edHealth Group Inc. made an of­fer for Aetna, the third-largest health in­surer, the Wall Street Jour­nal re­ported. The health in­sur­ers in­volved have all de­clined to com­ment on the pos­si­ble tieups.

When the dust fi­nally set­tles, some an­a­lysts ex­pect the three largest com­pa­nies — Unit­edHealth, An­them and Aetna — to emerge even stronger. A Unit­edHealth-Aetna com­bi­na­tion could fur­ther nar­row the field to two gi­ant pub­licly traded com­pa­nies: Unit­edHealth and An­them.

“There are many com­bi­na­tions here. No one wants to be left out of this dance,” said Ana Gupte, a healthcare an­a­lyst at Leerink Part­ners.

The con­sol­i­dated com­pa­nies would be able to take ad­van­tage of the rev­enue growth from the Af­ford­able Care Act and the pri­va­ti­za­tion of Medi­care and Med­i­caid, she said.

The health in­sur­ance sec­tor has seen its for­tunes soar dur­ing the health law’s ex­pan­sion of sub­si­dized, pri­vate cov­er­age and Med­i­caid, the joint state-fed­eral in­sur­ance pro­gram for the poor.

Shares of An­them, the na­tion’s sec­ond-largest health in­surer, have jumped 85% since Jan­uary 2014 while the broader stock mar­ket has re­turned 16% for the same pe­riod.

In­sur­ers have wel­comed the in­fu­sion of new mem­bers as growth slowed in their con­ven­tional em­ployer ben­e­fits busi­ness.

But ris­ing mem­ber­ship and rev­enues haven’t trans­lated to fat­ter profit mar­gins for much of the in­dus­try, said Jeffrey Loo, a healthcare eq­uity an­a­lyst at S&P Cap­i­tal IQ.

Fitch Rat­ings an­a­lysts said that pres­sure on profit mar­gins could in­ten­sify as fed­eral of­fi­cials and em­ploy­ers push harder to re­duce healthcare costs.

The su­per­sized in­sur­ers may be able to use their big num­bers to win bet­ter terms and lower prices from hos­pi­tals, doc­tors and drug mak­ers.

It also may ease the com­pe­ti­tion on Oba­macare ex­changes and in bid­ding for Med­i­caid man­aged-care con­tracts from cash­strapped states.

Whether those sav­ings will be passed on to pa­tients re­mains un­clear.

Some ex­perts are skep­ti­cal that this healthcare arms race will ad­dress the un­der­ly­ing prob­lems with waste­ful med­i­cal spend­ing, which ac­counts for up to 30% of over­all costs by some es­ti­mates.

“Con­sol­i­da­tion in­vari­ably leads to higher costs to con­sumers,” said David Gru­ber, di­rec­tor of healthcare re­search at Alvarez & Marsal. “We’ve seen it in med­i­cal de­vices, phar­ma­ceu­ti­cals, and hos­pi­tals and health sys­tems.”

Loo tends to agree that in­vestors may be the only ones cheer­ing in the end.

“Healthcare premi­ums keep ris­ing ev­ery year, and I don’t see these deals be­ing ben­e­fi­cial to in­di­vid­ual con­sumers,” Loo said.

An­them is Cal­i­for­nia’s sec­ond-largest health in­surer be­hind HMO gi­ant Kaiser Per­ma­nente. An­them, Kaiser and Blue Shield of Cal­i­for­nia dom­i­nate the state’s large em­ployer mar­ket and the Cov­ered Cal­i­for­nia ex­change for in­di­vid­u­als.

Those three com­pa­nies held 78% of Cal­i­for­nia’s em­ployer and in­di­vid­ual mar­ket in 2012, ac­cord­ing to the latest data from Cit­i­group. Unit­edHealth, Aetna and Cigna play a smaller role with a com­bined 13% of the mar­ket.

An­them’s last ma­jor deal came in 2012, when it ac­quired Med­i­caid in­surer Ameri­group for $4.5 bil­lion. It runs Blue Cross plans in Cal­i­for­nia and 13 other states.

The In­di­anapo­lis com­pany had $1.4 bil­lion in cash on its bal­ance sheet as of March, and low in­ter­est rates mean tak­ing on debt re­mains at­trac­tive. At re­cent in­vestor con­fer­ences, An­them ex­ec­u­tives have struck a bullish tone on ac­qui­si­tions.

“I like the pric­ing en­vi­ron­ment a lot, and we have a lot of ca­pac­ity to work with to do a cash trans­ac­tion of mean­ing­ful size — and it would be trans­for­ma­tive,” Wayne DeVeydt, An­them’s fi­nance chief, said at a UBS con­fer­ence last month.

If the big­ger com­pa­nies get swal­lowed up, at­ten­tion may shift to mid-size play­ers like Wood­land Hills in­surer Health Net Inc. and Molina Healthcare Inc. of Long Beach.

Both com­pa­nies could be at­trac­tive takeover tar­gets for their ex­pe­ri­ence serv­ing Med­i­caid pa­tients in Cal­i­for­nia and other states.

Even the prospect of a Supreme Court rul­ing this month elim­i­nat­ing Oba­macare sub­si­dies for mil­lions of Amer­i­cans hasn’t dimmed the deal talks.

Loo said health in­sur­ers ap­pear con­fi­dent that con­gres­sional Repub­li­cans will be too fear­ful of a voter back­lash to let pre­mium as­sis­tance dis­ap­pear en­tirely.

“They fig­ure the Repub­li­cans will put forth some stop­gap mea­sure,” he said.

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