Health Net to sell Medicare Part D business to CVS

Health Net announced Jan. 9 that it will sell off its standalone Medicare drug plan membership, raising speculation that the company will be bought by a larger health plan in the near future.

The company's business is concentrated in California, in commercial, Medicaid and Medicare Advantage plans. It also holds a contract to administer Tricare benefits in the West.

CVS Caremark will buy the Part D membership for $160 million, taking Health Net's 400,000 members in 49 states. CVS Caremark had 3.5 million Part D members in 2011. In the short term, Health Net expects the sale to net about $140 million after transaction costs.

Health Net will continue to sell Medicare Advantage and Medicare supplement plans as well as commercial coverage.

The sale is part of a longer-range trend of consolidation in Part D drug plan business, characterized by a shrinking number of enrollees in the smallest plans.

"Currently, 51 [prescription drug plans] have fewer than 100 enrollees, and 307 have fewer than 1,000 enrollees -- the level at which CMS urges sponsors to consider withdrawal or consolidation," according to analysis of 2011 enrollment data by the Kaiser Family Foundation.

Goldman Sachs investment analyst Matthew Borsch wrote that the sale made "strategic sense," given Health Net's relatively small membership in Part D plans, which makes it difficult to attain economies of scale. Health Net, which would be left with about 2.5 million medical members after the sale to CVS, is a much smaller company than it was a few years ago. Its membership peaked at about 3.7 million, where it stayed from 2006 to 2008. It sold its business on the East Coast in a deal with UnitedHealth Group finalized in 2010.

Now that it is more streamlined, it could become a target for a larger plan interested in expanding in California, where Health Net's membership is concentrated, Borsch wrote.

Its experience in the California market could be useful, with the state announcement in January that it plans to move more Medicaid recipients, particularly those dually eligible for Medicaid and Medicare, into managed care. Health Net has a strong Medicaid managed care business in California, with nearly 1 million Medicaid members as of Sept. 30, 2011, a 10.3% increase from a year earlier.

Borsch wrote in his note that Health Net's opportunity to add dual-eligibles to its rolls and the Part D sale make "the sale of the company more likely, in our view, given the consolidation trend in the industry."

Health Net spokeswoman Margita Thompson said the company does not comment on market speculation.