Acquisition may be first wave of Medicaid managed care consolidations

WellPoint’s purchase of Amerigroup is expected to be the first of many deals that further will consolidate the Medicaid managed care market and could give the largest health plans even greater leverage in contract negotiations with physicians for all private plans.

In a deal announced July 9, WellPoint agreed to pay $4.9 billion for Amerigroup in a deal that would nearly double the size of WellPoint’s Medicaid business to cover more than 4.5 million enrollees. Amerigroup is contracted to manage Medicaid benefits for beneficiaries in 13 states, including some states where WellPoint runs for-profit Blues plans, including Georgia, New York and Virginia. The deal is pending approval by state and federal regulators.

WellPoint’s intentions, particularly where Medicaid is concerned, are not unique, industry analysts say. They expect other large insurers to buy Amerigroup’s competitors, Medicaid managed care companies such as Centene, Molina Healthcare and WellCare.

In a July 11 note to investors, Goldman Sachs investment analyst Matthew Borsch identified two reasons for that expected consolidation. First, companies such as WellPoint are trying to diversify. Second, the expansion of Medicaid outlined in the Affordable Care Act could call for major investments in infrastructure that the Medicaid-only health plans can’t afford, but that the big insurers can.

After the ACA ruling by the Supreme Court that states could not be forced to expand Medicaid eligibility, some states have said they will opt out of the broadening of the program as outlined in the health system reform bill. But even without more generous eligibility rules, Medicaid is expected to demand an increasingly large part of state budgets. Managed care appeals to states as a way to build in predictability and reduce spending on Medicaid.

Amerigroup Chair and CEO Jim Carlson, who is staying on to manage the business once it becomes part of WellPoint, addressed the growth prospects as he spoke to investment analysts during a call announcing the deal. While some states said they don’t want to expand Medicaid to cover new populations designated by the ACA, they might change their minds, he said.

“Some [states] have had some pretty pointed comments about their perspective on growth, but I think some of that is rooted in their frustration with the cost of their existing programs,” he said. “When you step back from all this, there are billions of dollars of federal money that are going to flow into the states. We think the states are going to need to take it. They’ve got 100% match of their costs in the early years; it winds down to 90% over time. That’s very compelling from a state budgetary standpoint.”

WellPoint and its competitors are particularly interested in managing care for people eligible for both Medicaid and Medicare, known as dual-eligibles. The federal and state governments spend $300 billion every year on care for about 9 million dual-eligibles.

The four largest states — California, Florida, New York and Texas — represent $100 billion of that total, and the combined WellPoint-Amerigroup will have a strong presence in those states, WellPoint Chair, President and CEO Angela Braly noted in her discussion with investment analysts.

Doctors wary of further consolidation

Managed care companies contracted to administer Medicaid don’t set physician payment levels, but they do set policies that can create hassles for physicians. A deal like WellPoint’s purchase of Amerigroup could mean that it has more power to set those kinds of policies, because there will be fewer alternative plans.

For example, WellPoint runs Blue Cross and Blue Shield of Georgia, and Amerigroup is contracted as a Medicaid MCO, so the combined plan would be very powerful in that state.

“We are very worried they will try to put forward all-product clauses,” said Donald Palmisano Jr., executive director and CEO of the Medical Assn. of Georgia.

Under an “all products” clause, physicians must be part of every one of an insurers’ networks if they want to be included in one — meaning, they can’t be part of the Blues’ commercial network but opt out of its Medicaid network. WellPoint has not said it will introduce all-products clauses because of the Amerigroup acquisition.

In New York, WellPoint operates Empire BlueCross BlueShield, and Amerigroup is contracted as a Medicaid MCO. The power that a few insurers have over so many patients and network physicians threatens to overwhelm physicians, said Moe Auster, vice president for legal and regulatory affairs for the Medical Society of the State of New York.

“This continuing consolidation in the health insurance industry and the mercy that this places individual physicians [under] causes an even greater need to permit physicians to collectively negotiate with health insurance companies,” he said.