Cigna expands with Great-West health deal

The company gains ground in the small-group market and Western states with the $1.5 billion purchase.

By Emily Berry — Posted Dec. 17, 2007

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With its largest acquisition, Cigna is joining other health plans in expanding its presence in niche markets.

Cigna announced in late November it would buy Great-West Life & Annuity Insurance Co.'s health care business for $1.5 billion in cash plus a $400 million investment commitment to boost the business. That adds 1.5 million members to Cigna's network, assuming the company gets the approval of state and federal regulators.

Cigna says it covers about 47 million lives under its medical, dental, behavioral, vision and drug benefit programs.

Great-West is known for helping businesses as small as 20 employees self-insure their health benefits, Cigna spokesman Joe Mondy said.

"In addition to the geographic expansion, that's a particular growth opportunity [for Cigna]," he said.

Cigna executives told analysts during a conference call reviewing the deal that the purchase would mean expansion in the small-group-health area, and also strengthen its presence in some key markets.

Winnipeg, Manitoba-based Great-West Lifeco, the parent company of the U.S. units, is one of Canada's largest insurers, but analysts said it did not gain enough traction in the U.S. health care market to compete with the largest American health plans. Great-West Healthcare has its greatest membership in California, Colorado, Florida, Illinois and Texas, though it has a relatively small market share even in those states.

But there is concern that the deal, the latest in a string of large health plans buying regional or specialty health insurers, will diminish competition. For example, where 10 or 15 years ago, there were easily 20 health plans for a small business in Denver to choose from, there are many fewer now, said David Kikumoto, chief executive officer of Denver Management Advisors, a consulting and insurance brokerage firm.

Meanwhile, in Pennsylvania, a deal announced in March to merge the state's two largest insurers, nonprofits Highmark Inc. and Independence Blue Cross, is still pending approval from state and federal regulators. At an Oct. 23 hearing, Pennsylvania's state insurance commissioner said review could take at least until next summer. The deal would merge the two largest health plans in Pennsylvania, giving it a 53% market share. Aetna, the next largest plan, would have the second-largest share at only 5.8%.

The merger, whose acquisition costs have not been revealed, would create the nation's fifth-largest health insurer based on revenue. The Pennsylvania Medical Society has asked regulators to keep a "close eye" on the deal before issuing any approval.

For-profit plans have also focused on beefing up their regional and specialty strength.

UnitedHealth Group agreed to buy Sierra Health, in Nevada, for $2.6 billion in March of this year. That deal has received all necessary state approvals but is waiting for a go-ahead from the U.S. Dept. of Justice. The American Medical Association joined the Nevada State Medical Assn. in opposing the deal, which both groups say will give United a dominant market share in the state.

Meanwhile, United also recently spent $775 million to acquire the health business of Wisconsin-based FiServ. That business focused on third-party administration, custom benefit services and outsourcingservices.

Also, WellPoint recently added membership through the dissolution of the HMO operated by Indianapolis-based M Plan, which advised its members to join WellPoint's Anthem Blue Cross Blue Shield of Indiana network.

Robert Freinkel, MD, an allergist in solo practice in Vallejo, Calif., said recent mergers and acquisitions have been bad for his patients and his practice. He said neither Cigna or Great-West are very powerful players in Northern California, but the deal was another sign of the consolidation of the health plan market.

"I think it's really threatening the viability of small and solo practices to survive in this marketplace, particularly when you have large insurance companies paying no more than -- and often considerably less than -- Medicare," he said.

Mondy said Cigna's purchase of Great-West didn't include much geographic overlap. "In areas such as the Pacific Northwest, that's an area we don't have much market penetration and want to have more," he said.

The result of the deal will be more business for physicians in both plans' networks and greater physician choice for members, Mondy said.

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Growing bigger by going smaller

Cigna has agreed to pay $1.5 billion for Great-West Healthcare, a division of Great-West Life & Annuity. The deal will give Cigna 1.5 million more health plan members and a big boost in the small business market, which Great-West covers.

Here are Great-West's medical membership numbers in its top five states:

Colorado 186,000
Texas 165,000
California 159,000
Florida 84,000
Illinois 59,000

Source: Great-West Healthcare

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