Consolidation continued to reshape the health insurance landscape last week as one national insurer sought out new markets and two regional health plans sought to protect their old turf.
The planned mergers follow in the footsteps of a slew of previous mergers across the healthcare landscape, such as in medical devices, where each of the major device sectors have been whittled down to three major players (May 16, p. 6).
The biggest of the recent merger announcements was WellPoint's Sept. 27 announcement that it planned to pay $6.5 billion to acquire WellChoice, the New York-based parent of 5 million-member Empire Blue Cross and Blue Shield and the last independent, publicly traded Blues plan in the country. The acquisition-believed to be the fourth largest transaction in managed-care history-would bring a 14th Blues plan under WellPoint's national umbrella, boosting its total enrollment to 33 million members in 14 states.
On Sept. 29, HIP Health Plan of New York unveiled an agreement to merge with crosstown rival Group Health in a nonmonetary transaction that would create a new local powerhouse with 4 million members in New York and combined revenue of $7 billion.
Meanwhile, GE Healthcare agreed to buy IDX Systems Corp. in South Burlington, Vt., by early 2006 for $1.2 billion (See story, p. 7).
WellPoint's purchase of WellChoice would give WellPoint a dominant foothold in the lucrative Northeast market, particularly New York, the proverbial epicenter for national accounts. WellPoint's main rival, UnitedHealth Group, made strong inroads in the region last year, spending a total of almost $9 billion on the back-to-back acquisitions of Oxford Health Plans and Mid Atlantic Medical Services.
Meanwhile, the merger of HIP and Group Health seemed more of a defensive move, designed to give the two not-for-profits the greater muscle needed to defend their home turf from better-financed national players like WellPoint and UnitedHealth. HIP in March acquired 270,000-member ConnectiCare and agreed in June to purchase health savings account provider PerfectHealth Insurance Co.
Both deals are expected to close in the first quarter of 2006, pending regulatory and other approvals.
WellPoint and WellChoice officials said they expect the merger to lead to better patient care and to help hold down rising healthcare costs by creating greater administrative efficiencies. Meanwhile, HIP and Group Health vowed to continue their "commitment to improving quality, access and affordability" as a combined organization.
But doctors and hospitals fear that the insurers could try to recoup their enormous merger costs by ultimately boosting premiums, dropping services or cutting payments to providers. The announcements come as providers are already grappling with soaring medical malpractice premiums, rising numbers of uninsured patients and lower government reimbursements, said Kenneth Raske, president of the Greater New York Hospital Association.
"It's economics 101: The more consolidated the marketplace becomes, the tougher the bargaining position that insurers take with providers," Raske said, adding that New York's hospitals-which are required by law to remain not-for-profit-lost a combined $277 million in 2003 while the state's insurers enjoyed total net profits of $1.5 billion. "Our hospitals are in economic turmoil, and (the mergers are) only going to exacerbate the situation."
Take it or leave it?
Physicians, too, fear the fast-consolidating industry will force them-and their patients-into a take-it-or-leave-it situation. "Consumers and their doctors are having to sign unfavorable contracts (with insurers) because they virtually have no choice," said Donald Moy, general counsel for the Medical Society of the State of New York. "We question whether that will have an adverse impact on the quality of care."
Further taxing the nerves of local providers and consumer groups is the fact that HIP has long been considering converting to for-profit status once the state passes enabling legislation, as endorsed by Gov. George Pataki.
If that were to happen, and the HIP-Group Health merger went through, metropolitan New York would be dominated exclusively by for-profit insurers, including Aetna, Cigna Corp., UnitedHealth and, ostensibly, WellPoint.
"Group Health has traditionally been much more vocal about maintaining their not-for-profit roots," said Chuck Bell, programs director for Consumers Union, a consumer advocacy group. "But now it looks like they're going to be absorbed into HIP's conversion trajectory, which we believe is very much against the public interest."
No money will change hands under the HIP-Group Health deal, said a spokeswoman for the companies. The two insurers will continue to operate separately, albeit under a joint board of directors, until a formal integration plan is developed. HIP Chairman and Chief Executive Officer Anthony Watson would retain his current position at the new, as-yet-unnamed company, while Group Health President and CEO Frank Branchini would be president.
Under the WellPoint-WellChoice deal, WellChoice shareholders would receive $77.23 in cash and WellPoint stock for each share of WellChoice. The acquisition requires the approval of state and federal regulators, WellChoice shareholders and the Blue Cross and Blue Shield Association.
The New York Public Asset Fund-which was created to handle the proceeds of WellChoice's for-profit conversion in 2002 and now owns 62% of insurer's stock-signed off on the deal after rejecting previous offers by WellPoint of $73 and $76 per share. The deal, if completed, would enrich the state's coffers by roughly $4 billion.
Consumers Union is calling for the state to put a portion of that money into a charitable foundation that would fund long-term healthcare programs. Much of the money has already been earmarked for short-term purposes, such as paying for three years of raises for hospital and nursing-home workers.
Sweetening the pot
Bell said a HIP-Group Health merger could sweeten the pot for New York lawmakers to authorize a HIP conversion. Experts estimate the sale of equity in HIP alone could net as much as $2 billion for the state, which is facing a mounting budget crunch. If the combined company converted, it could produce much more money.
Neither transaction raises major antitrust concerns, industry observers said. WellPoint and WellChoice have virtually no market overlap, so the acquisition wouldn't affect local competition. And if HIP and Group Health merged, they would still control only about 18% of the New York market, compared with WellChoice's 22% and UnitedHealth's 13%. "Market share in the 20% range typically doesn't raise any red flags with the Justice Department," said Mike Cowie, an antitrust lawyer with Howrey Simon Arnold & White.
Still, the deal could face tough political scrutiny in New York, where state Attorney General Eliot Spitzer has cracked down on numerous industries in recent years. "New York has an activist attorney general. I can't imagine his office letting an opportunity like this go by without comment," said Sheryl Skolnick, an analyst with Fulcrum Global Partners.
Executive payouts have become a particular sticking point for state officials. The merger of Anthem and WellPoint Health Networks last year that created WellPoint, for example, was temporarily held up by California Insurance Commissioner John Garamendi, who said the deal would lead to higher prices while unfairly enriching WellPoint executives (Nov. 2, 2004, p. 14). And now California Treasurer Phil Angelides is challenging UnitedHealth's planned acquisition of PacifiCare Health Systems, claiming the $314 million in payouts earmarked for top executives is excessive.
WellChoice President and CEO Michael Stocker would receive $5.58 million six months after the deal closed and 30,000 WellPoint shares that could be sold in April 2007, if he was still employed by WellPoint. Stocker has agreed to become president and CEO of WellPoint's newly combined Northeast region, which would include Empire as well as Blues plans in Connecticut, Maine and New Hampshire.
Since January, at least a half-dozen health plans have been snapped up by larger rivals, while seven of the 10 largest mergers in managed-care history have been struck or completed in the past two years alone.
Last week's merger announcements are prime examples of "the hypercompetitive health-insurer space, where scale is imperative and expanding geographic reach is nearly impossible without making acquisitions," said Matthew Josefowicz, manager of the insurance group at consultancy Celent.
But some experts have begun to question whether insurers are getting ahead of themselves in the race for size. Fitch Ratings, for example, placed HIP on negative credit watch, stating that the combined company's financial picture would be weaker than HIP's alone. Although the merger would provide a number of important benefits, Fitch analysts wrote in a news release, "concerns regarding the impact on (HIP's) near-term financial profile and integration risks more than offset the long-term strategic benefits of the merger."
Meanwhile, Skolnick said, WellPoint has agreed to pay a 9.4% premium for an acquisition that isn't expected to add to earnings until 2007. Company officials said they expect the WellChoice deal to generate cost savings of $25 million in 2006, $50 million in 2007 and $125 million or more by 2010.
Harder to come by
Future Blues plan acquisitions could be harder to come by for WellPoint. All the remaining Blues plans are not-for-profit, making them typically tougher to acquire. Past attempts by WellPoint's predecessor companies to acquire Blues plans in Kansas and Maryland were derailed amid heated opposition by regulators and consumers (July 19, 2004, p. 7).
One possible exception may be Horizon Blue Cross and Blue Shield of New Jersey; state officials have been encouraging it to convert to for-profit status. Horizon publicly shelved conversion discussions in July. "But now, with WellPoint virtually moving in next door, the issue could get revisited," Bell said.
In the meantime, WellPoint will likely continue to make smaller, non-Blues acquisitions to strengthen its position in specific markets, analysts said. In June, the company acquired consumer-driven healthcare firm Lumenos for $185 million to expand its presence in the fast-growing market for health savings accounts.
What do you think?
Write us with your comments. Via e-mail, it's [email protected]; by fax, 312-280-3183.