Health insurance merger and acquisition activity, quiet for the past two years, may pick up in 2015 as insurers become comfortable with reform's operating rules and hunger for expansion in the lucrative Medicare and Medicaid markets, industry observers say.
Smaller publicly traded insurers such as Centene Corp. and WellCare Health Plans have been rumored takeover targets for large-cap insurers. Speculation also has swirled around Humana merging with a larger competitor. Humana declined to comment.
Health plans are considering how they can scale up in today's changing market, said Brian Wright, a Sterne Agee analyst.
The last major wave 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. In Medicaid managed care, Aetna bought Coventry for $5.7 billion, and Anthem (formerly WellPoint) purchased Amerigroup for $4.9 billion.
Insurers completed those deals as the healthcare reform law's minimum medical-loss ratios, federal reviews of rate increases, Medicare Advantage rate cuts and the health insurance premium tax were starting to take effect. Transactions largely abated in 2013 and 2014 as insurers waited to see how the law would play out, said Chris Rigg, an analyst at Susquehanna Financial Group. Deals that occur were smaller, such as Blue Shield of California's purchase of Care1st Health Plan. That watch-and-wait period could now be over.
“There could be a decent-sized deal announced this year,” Rigg predicted.
“The problem thus far seems to be a lack of willingness from sellers,” J.P. Morgan Securities analyst Justin Lake wrote in a note to investors.
Many believe the likely sellers are the prospering insurers specializing in Medicare and Medicaid, such as Centene, Health Net, Molina Healthcare, Universal American and WellCare.
Centene, which has a major Medicaid presence, may explore acquiring a Medicare Advantage company, said Ana Gupte, a managing director at Leerink Partners.
Louisville, Ky.-based Humana, the smallest of the big five insurers with a market capitalization of $22.4 billion, is an attractive target because it's a major player in the lucrative Medicare Advantage market. Wright, however, thinks a takeover of Humana is increasingly unlikely because of its growing value.
Some of the smaller, regional insurers may look to create loose collaborations to stay independent. “Boards of directors and management believe that a local focus brings value to customers,” said Paul von Ebers, a former CEO of Blue Cross and Blue Shield of North Dakota who is now a consultant.