The pending megamerger between Anthem and WellPoint Health Networks, announced last September, appears to have set the stage for a new round of managed-care acquisitions this year.
Since January, at least a half-dozen health plans have been snapped up by larger rivals, and rumors now abound about a potential merger involving Blues plan giant WellChoice and a key East Coast rival. Even national players like Aetna, which had sworn off acquisitions over the past few years, are back in the fray.
Insurers have long looked to mergers as a way to gain greater bargaining clout with providers while reducing administrative costs and spreading their medical expenses across a larger pool of patients. But the pace of such deals could pick up this year as insurers begin to enjoy renewed profit growth thanks to moderating medical-cost increases and higher premiums, said Thomas Carroll, a healthcare analyst with Legg Mason.
"This is a consolidating industry. It's been consolidating for 10 years and it's going to keep consolidating, helped in part by insurers' improved financial strength," Carroll said.
By far the largest deal in the works is the $16.4 billion merger between Anthem and WellPoint. That deal, expected to close midyear, would vastly alter the managed-care industry, bringing 13 Blues plans and 27 million members-or one of every 11 Americans-under the umbrella of a single for-profit entity (Nov. 3, 2003, p. 6).
But industry observers are already bracing for a possible merger involving another dominant Blues plan, WellChoice. The New York-based parent of Empire Blue Cross and Blue Shield-the nation's last remaining independent, publicly traded Blues plan-is reportedly in advanced talks to acquire Oxford Health Plans, Trumbull, Conn., in a multibillion-dollar deal that would create an insurance powerhouse with 6.3 million members in Connecticut, New Jersey and New York. Officials at both companies declined to comment.
In many ways, the deal makes sense. The two insurers are already market leaders in metropolitan New York, and combining their operations could generate annual savings of up to $38 million, Carroll estimated.
And while Oxford is more profitable than WellChoice, WellChoice holds the advantage in membership. Though each insurer posted 2003 revenue of about $5.4 billion, Oxford's net income jumped 59% to $352 million, while WellChoice's earnings fell 47% to $201 million. Still, WellChoice boosted its enrollment 3% last year to 4.75 million members, and it expects another 3% to 4% increase in 2004. Oxford saw its enrollment slip 4% to 1.54 million members in 2003 and foresees losing more members by year-end because of price competition and an uncertain economy.
The rumored merger, however, is anything but certain. The deal-which would give the combined company a market share of more than 35%-could be stymied by antitrust concerns or complications surrounding use of the Blues trademark. Also, WellChoice faces a lawsuit challenging the legality of its for-profit conversion in October 2002, said Richard Foote, senior analyst with Samuel A. Ramirez & Co.
Opposition from providers could pose another obstacle, Carroll said. "The Greater New York Hospital Association is a very powerful lobby, and hospitals are invariably against any transaction that reduces the number of insurers, thereby giving the remaining players that much more clout in negotiating rates," he said.
Blues plans aren't the only ones behind the recent merger activity. For instance, Aetna in December acquired the Chickering Group, a Boston-based provider of health benefits for college students. Aetna had been dormant over the past few years as it worked to slim down its membership, which had ballooned to 21 million after a rash of misguided acquisitions in the 1990s. But the insurer is again scouting for smaller, regional plans of about $500 million, company officials said.
Meanwhile, current industry leader UnitedHealth Group continued its buying binge this month, agreeing to acquire the 137,072-member HMO business of Touchpoint Health Plan, Appleton, Wis., for $40 million. UnitedHealth acquired Golden Rule Financial for $500 million in November 2003 and 2 million-member Mid Atlantic Medical Services for $2.95 billion in February 2004.
Founded in 1987, Touchpoint is owned by three-hospital ThedaCare, Appleton, Wis.; Bellin Health System, Green Bay, Wis.; and a group of independent physicians. Its 165,000-member PPO is not part of the sale.
Local provider-owned plans have become increasingly attractive acquisition targets for large national insurers looking to fill gaps in their geographic reach. In January, for instance, Coventry Health Care agreed to acquire Rockford (Ill.) Health System's 20,000-member health plan to strengthen the foothold it established in Illinois last year when it bought 78,000-member PersonalCare from Provena Health, Frankfort, Ill. And this month, Humana completed its purchase of Ochsner Clinic Foundation's 188,000-member HMO in New Orleans, giving it a new hub from which to expand throughout the fast-growing Southeast (Feb. 9, p. 24).
Unlike many of the provider-owned HMOs sold before them, both Ochsner Health Plan and Touchpoint are profitable, the latter having earned $5.5 million on $317 million in revenue last year. But the two HMOs have continued to lose members to national insurers such as UnitedHealth as more local businesses-traditionally their bread and butter-have been absorbed by multistate corporations over the years. UnitedHealth currently covers more than 18.7 million members nationwide, including 400,000 in Louisiana and 250,000 in Wisconsin.
"More and more, national companies are wanting to contract with just one insurer wherever they are. Touchpoint couldn't do that," said Touchpoint spokesman John Gillespie.
Rockford Health Plans also has lost members, including 8,000 when automaker DaimlerChrysler switched coverage for its Illinois workers to Humana last year. The plan lost $16 million over the past three years, including a $2.7 million loss in 2003, according to the National Association of Insurance Commissioners.
Local Medicaid HMOs are also being snatched up by well-heeled national and regional insurers eager to cash in on the prospect of increased state reimbursement rates. In March, WellCare Health Plans, Tampa, Fla., agreed to acquire Illinois' largest Medicaid HMO, 85,000-member Harmony Health Plan, Chicago, for an undisclosed sum. WellCare, which plans to go public this year, will have about 665,000 members in six states after the acquisition.
And in February, Molina Healthcare agreed to acquire Health Care Horizons, Albuquer-que, for $69 million in its first foray into New Mexico. A month later, it announced plans to take over Premera's 66,000 Medicaid and Basic Health Plan members in Washington state for an undisclosed sum. Long Beach, Calif.-based Molina-which intends to divest Health Care Horizons' 42,000 commercial members and focus on its 66,000 Medicaid members-will cover about 720,000 beneficiaries in five states once the two deals close.