Health plan market primed for further consolidation

Interest in Medicare and Medicaid business is expected to drive more mergers and acquisitions after Aetna’s purchase of Coventry Health Care.

By — Posted Sept. 3, 2012

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Health insurers believe that going big will give them an advantage in the post-health system reform marketplace and expect to continue to consolidate beyond two major acquisitions announced this summer.

The result for physicians could be even less leverage in fee schedule negotiations and pressure to participate in health plans’ Medicaid managed care and Medicare Advantage networks to be part of commercial networks.

“Size is power,” said Stephen Monroe, managing editor at Irving Levin Associates, which publishes analysis and data on mergers and acquisitions.

Monroe sees plenty of potential for the number of health plans to dwindle further as they merge or sell out to competitors, driven by a need for scale as they adapt to health reform rules and try to negotiate with hospitals and physicians, who also have been consolidating.

Irving Levin tracked an uptick in health plan mergers and acquisitions in the second quarter of 2012 with nine reported deals — 50% higher than the first quarter and 125% higher than the same quarter in 2011. The firm estimated the value of the deals reported during the second quarter of 2012 at $730 million.

Third-quarter figures are likely to dwarf the previous quarters and years. Aetna announced Aug. 20 that it will buy Coventry Health Care for $7.3 billion, six weeks after WellPoint said it will buy Amerigroup for $4.9 billion. Aetna and WellPoint said the deals will help them boost their presence in Medicaid managed care and Medicare Advantage markets.

With the Coventry purchase, about a third of Aetna’s business will come from government-sponsored programs.

“Large private insurers are taking an educated guess that there’s going to be a large, continued Medicaid expansion, and they want to take advantage of that, and that’s regardless of the Supreme Court ruling,” said Jason Koma, spokesman for the Ohio State Medical Assn.

The Affordable Care Act called for a major expansion of Medicaid eligibility, but the U.S. Supreme Court ruling that upheld most of the law also held that the federal government could not compel states to expand their Medicaid rolls. Some states plan to follow the ACA’s directive anyway, and population growth and economic factors are expected to feed into Medicaid enrollment even if eligibility remains unchanged.

As enrollment grows, states are expected to rely more heavily on managed care companies to administer benefits, particularly for the chronically ill. At the same time, the aging population is expected to mean growth in Medicare Advantage enrollment.

“The government is going to become a larger and larger payer for health care, and everyone is trying to get on that bandwagon,” Monroe said.

Health plans also are positioning themselves for 2014, when the individual health insurance mandate takes effect and state-based health insurance exchanges are scheduled to launch. In a note to investors, Dave Shove, an investment analyst with BMO Capital Markets, said the Aetna-Coventry deal will help Aetna prepare for that change.

“Members of low-income groups are expected to frequently shift from Medicaid eligibility to subsidized individual plans subsequent to 2014,” he wrote. “Following the deal, Aetna will be better positioned to serve (and keep enhancing profitability) these exchange shoppers with competitive offerings that reach across the consumer’s spectrum.”

That full-spectrum approach is on other health plan’s minds as well, and is expected to drive more deals until 2014.

Monroe said the Aetna and WellPoint deals, which must be approved by state and federal regulators, make 2012 the busiest in at least five years for health plan mergers and acquisitions.

What more deals will mean for doctors

The prospect of further diminished competition in the health insurance market concerns some physicians and their advocates.

“The proposed merger of Aetna and Coventry Health Care follows a trend that the AMA finds very troubling,” American Medical Association President Jeremy A. Lazarus, MD, said in a statement. “Our most recent annual study of commercial health insurance markets has concluded that over 80% are highly concentrated. Competition, not consolidation, is the right prescription for health insurer markets. Competition would help lower patient premiums, force insurers to enhance customer service, pay bills accurately and on time, and develop and implement innovative ways to improve quality while lowering costs.”

Koma said health plan consolidation tends to add hassles to physicians’ lives.

“When there is less competition, there is less ability to negotiate, more of what we call ‘managed care,’ which is really restricted formularies and prior authorizations,” he said.

Koma said the medical society also is concerned that health plans will use contract terms known as “all products” clauses to pressure physicians into accepting patients who are part of a health insurer’s Medicaid managed care plan in addition to its commercial plan, for example.

Health insurers may be combining and growing in part to gain leverage over hospitals and physician groups that also have been busy merging and acquiring, said Thomas Greaney, a professor at St. Louis University School of Law and director of its Center for Health Law Studies.

“Who is left out?” he asked. “The one left out who doesn’t have bargaining power might be small, independent physician groups. They don’t have negotiating power if mergers like this are allowed to go forward.”

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Breaking down major health plan deals

Aetna announced Aug. 20 it will buy Coventry Health Care, just weeks after WellPoint said it will buy Amerigroup. The two purchasing companies will gain Medicare and Medicaid membership, positioning them for an insurance marketplace increasingly supported by state and federal governments.

Membership as of June 30, 2012 (in thousands)
Type of insurance Aetna Coventry Total
Commercial 16,221 2,248 18,469
Medicare Advantage 437 253 690
Medicare Part D (stand-alone) 471 1,494 1,965
Medicaid 1,188 932 2,120
Medicare supplement 183 (none reported) 183

WellPoint’ ssenior segment includes Medicare Advantage, Medicare Part D and Medicare Supplement membership. Of those subcategories, Amerigroup has only Medicare Advantage membership. WellPoint’s state-sponsored segment includes Medicaid managed care and CHIP benefits.

Membership as of June 30, 2012 (in thousands)
Type of insurance WellPoint Amerigroup Total
Commercial 26,771 (none reported) 26,77
Senior 1,516 36 1,552
State-sponsored 1,888 2,649 4,537

Source: Company filings with the U.S. Securities and Exchange Commission

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