The health insurance merger and acquisition scene has been noticeably quiet for the past two years. But consensus is building among industry observers that activity should pick up in 2015 as insurers become more comfortable with healthcare reform’s new operating environment.
Speculation also has centered around the possibility of Humana merging with one of its larger competitors. Humana declined to comment for this report, saying it is in the quiet period leading up to its fourth-quarter earnings call Feb. 4.
Health plans are considering how they can scale up in today's changing market. Buying competitors could be one approach they take. “At some point it's going to happen,” said Brian Wright, a Sterne Agee analyst. “I think it's inevitable.”
The last major wave of health insurance consolidation came in 2011 and 2012. Cigna Corp. bought HealthSpring, a Medicare Advantage company, for $3.8 billion. UnitedHealth Group acquired a majority stake in Amil Participacoes, a Brazilian integrated healthcare delivery network, for $4.9 billion.
Two of the most prominent deals during that time went to Aetna and Anthem (formerly WellPoint), and both broadened their Medicaid base. Aetna bought Coventry for $5.7 billion, while Anthem purchased Amerigroup for $4.9 billion.
Insurers completed those deals as or just prior to some of the biggest insurance components of the Patient Protection and Affordable Care Act took effect: minimum medical-loss ratios, federal rate reviews for individual and small-group products, the go-live of federal and state insurance exchanges, Medicare Advantage cuts and the health insurance fee that is helping to fund other portions of the ACA.
Consequently, transactions largely abated in 2013 and 2014 because insurers wanted to see how those elements would play out, Chris Rigg, an analyst at Susquehanna Financial Group, said in an interview.
That watch-and-wait period, at least the large for-profit players, could now be over. “There could be a decent-sized deal announced this year,” Rigg said.
“While impossible to predict timing, there is a consistent theme of consolidation being openly discussed by a number of management teams in the sector,” J.P. Morgan Securities analyst Justin Lake added in a note to investors. “The problem thus far seems to be a lack of willingness from sellers.”
Many believe those sellers are plans that specialize in Medicare and Medicaid, such as Centene, WellCare, Molina Healthcare, Health Net and Universal American. They have been highly profitable, but they may be reluctant to sell because the government-sponsored plans are viewed as the primary areas of earnings growth for insurers, analysts say.
But Centene, which has a major Medicaid presence and has vied for several state managed-care contracts, may explore acquiring a Medicare Advantage company, said Ana Gupte, a managing director at Leerink Partners.
One of the biggest insurers that has appeared in merger chatter over the past year is Humana. The Louisville, Ky.-based company primarily provides Medicare Advantage plans, which have been very lucrative and make it an attractive target. Humana is also the smallest of the big five insurers by market capitalization. UnitedHealth, Anthem, Aetna and Cigna are larger. But its $22.4 billion market cap is still far above Centene, Health Net, Molina and the other so-called small-cap insurers.
Sterne Agee's Wright, however, thinks a Humana takeover is increasingly unlikely because of Humana's rapidly growing value. “I think it gets harder and harder for potential acquirers to buy Humana,” Wright said. “The financials just don't work out” to where a deal can immediately be beneficial to earnings.
Not all health plans are expected to succumb to the merger bug. Like many not-for-profit hospitals, some of the smaller, regional insurers may look to create loose collaborations to stay independent. But it's unclear if those types of agreements will stave off aggressive insurers.
“Regional plans generally do not want to merge with larger national carriers,” said Paul von Ebers, the former CEO of Blue Cross Blue Shield of North Dakota who is now a consultant. “Boards of directors and management believe that a local focus brings value to customers.”
Traditional deals where one entity acquires another are only part of the consolidation puzzle, observers agree. Payers are expected to continue acquiring technology firms in an effort to be more than just health insurers. Recent examples include Aetna's $400 million purchase of Bswift, a tech company that manages health benefits for employers and health insurance exchanges, and UnitedHealth's acquisition of physician practice consulting firm MedSynergies.
Follow Bob Herman on Twitter: @MHbherman