“That's been a catalyst for a substantial amount of investment,” said Joshua Kaye, a Miami-based partner at law firm DLA Piper. “We're really seeing it on a national scale. Many insurers view health IT as being on the cutting edge.”
As insurers experiment with new payment models related to population health management, they're particularly interested in cost transparency tools and data and analytics, he said.
The new business lines allow insurers to diversify and strengthen their revenue base, said Jonathan Krieger, managing director at investment bank Berkery Noyes, which focuses on the technology sector.
“There's a lot of activity in the space,” he said. “They need to look for other ways to maintain their margins.”
In 2013, for instance, UnitedHealth Group's Optum division, which works in technology and population health management among other specialties, saw 26% growth in revenue and 61% growth in operating earnings. That helped contribute to UntiedHealth Group's overall strong performance for the year.
In its core insurance business, UnitedHealth saw its 2013 operating margin decline to 6.4%, down from 7.6% the previous year. But Optum's operating margin increased to 6.2% from 4.9% in 2012.
On a second-quarter earnings call, Aetna CEO Mark Bertolini said the company remains active in the M&A market, particularly in the international and technology space. And addressing where Aetna is looking, “it's definitely technology,” he said.
Cigna CEO David Cordani similarly pointed to “ongoing technological investments” as one area of focus in the second half of the year, when asked on the company's most recent earnings call.
In the rapidly growing digital health space, two of the most active acquirers in 2013 were Sandbox Industries, a venture capital firm backed by BlueCross BlueShield Venture Partners, and Lemhi Industries, another VC firm that counts UnitedHealth Group as an investor.
While the overall number of publicly disclosed deals in the insurance sector have remained small, Modern Healthcare's quarterly M&A Watch report found that 55.6% of transactions in the second quarter involved cost containment companies. Another 22.2% of deals focused on services such as administrative and benefit management solutions.