Behind 5 Major Health Plan Acquisitions

With so much of healthcare reform focused on hospitals and physicians, health plans have more or less been left to their own devices to figure out what role they will play in future of healthcare delivery. They have been very busy this year making acquisitions that will keep them in the center of the healthcare universe for years to come.

Health plan acquisitions in 2011 have focused on three areas, explains Steve Elek, a partner in PwC's Healthcare Transaction Services practice:

• Horizontal integration. These acquisitions include other health insurance companies. Elek says growth in the baby boomer population is among the factors driving interest among commercial carriers in Medicare Advantage companies. These acquisitions can create an opportunity for commercial insurers to attract lifetime members who can be easily shifted to a Medicare Advantage plan at age 65. He says Medicaid insurers offer another acquisition opportunity as more states turn to Medicaid managed care to help control the costs of that program.
• Vertical integration. These acquisitions include hospitals, physician groups, and urgent care and outpatient surgery centers. The goal is for health insurers to control the patient care cost centers. Elek says to look for more of this type of acquisition as health insurers become more proactive in the delivery of care to their members in order to bend the cost curve.
• International opportunities. These acquisitions include healthcare systems and insurers in other parts of the world. Elek says these acquisitions offer an opportunity for U.S. health insurers to diversify their revenue base.

Here's a look at five health plan acquisitions from 2011 that illustrate how health plans are using horizontal and vertical integration and even international acquisitions to meet strategic goals.

1. Cigna and HealthSpring
When Cigna plunked down in October some $3.8 billion to acquire HealthSpring, a Medicare Advantage plan, it gained instant credibility in the very desirable senior insurance market. Cigna has long been a major player in employer-sponsored business and in recent years has focused much of its attention on the growing international market. The insurer has fewer than 50,000 Medicaid Advantage members, almost all in Arizona.

Although the healthcare services company never tipped its hand that it was interested in the Medicare Advantage market the acquisition, which is expected to close in July 2012, makes perfect sense. The languishing national economy has slowed employee hiring and limited growth opportunities in the employers-sponsored insurance market while enrollment in government sponsored insurance is forecast to explode. Instead of taking three to five years to develop the infrastructure to ramp up its own Medicare Advantage enrollment Cigna set its sights on the Nashville-based HealthSpring.

The health plan brings more than 340,000 Medicare Advantage and 800,000 Medicare Prescription Drug Plan members in 11 states and the District of Columbia to the Cigna fold. "It's a turnkey acquisition," explains Nathan Goldstein, executive vice president and partner in Gorham Health Group. "HealthSpring is well established and successful in the Medicare Advantage market. It has a strong relationship with its physicians and is well-known by beneficiaries and regulators. Cigna can tap into all of that right away."

During a conference call held after the acquisition was announced, Cigna officials noted the combined customer footprint of the two companies provides scale and diversification to grow in existing markets and expand into new geographies.

Cigna's commercial group retirees and individual membership will provide a feeder pool for HealthSpring's Medicare Advantage products and Cigna's portfolio of specialty programs can be leveraged to benefit of the HealthSpring customer base. Look for Cigna to develop commercial products that incorporate HealthSpring's physician incentive and alignment model. Expect the two companies to take a cautious approach to the Medicaid market by entering selected markets

This may just be the beginning of Cigna's acquisitions. Company officials have expressed interest in acquiring some smaller Medicare Advantage health plans.

2. Highmark Inc. and West Penn Allegheny Health System

In June, in the midst of a public and acrimonious contract dispute with the University of Pittsburgh Medical Center, Highmark announced its intentions to acquire West Penn Allegheny Health System. The acquisition of the financially troubled health system seemed motivated as much by spite as business sense.

Sure, a successful Highmark-WPAHS combination could challenge the dominance of UPMC in the Pittsburgh-area market but WPAHS was teetering on closure when Highmark saved the day. The health system could be a money pit for the successful Blues plan, which will invest at least $475 million in the five-hospital system. But it could still be a sweet deal given that UPMC wanted an additional $400 million in annual reimbursements.

If you set aside all of the Highmark-UPMC finger pointing and the he-said-she-said drama, the Highmark-WPAHS deal represents another step in the realignment of the healthcare business. Owning a health system makes Highmark the ultimate insider in assessing the cost drivers of the healthcare delivery system. It puts the insurer in the driver's seat in terms of implementing quality and cost control programs across a large, vertically integrated system.

PWC's Elek sees possibilities for similar acquisitions in other regions of the country. This acquisition could serve as a model for other regional insurers to play a bigger role in the delivery of care to their members to make sure they receive the highest quality of care in the most appropriate setting.

It's still much too early to determine how this acquisition will play out. Highmark is moving forward with its commitment to West Penn to upgrade several facilities, including upgrading some trauma centers to allow for the treatment of more complex cases. Meanwhile, UPMC and Highmark remain at loggerheads and Gov. Tom Corbett is threatening state intervention to resolve the contract dispute.

3. WellPoint and CareMore Health Group

During a February conference call with investors, WellPoint CEO Angela Braly acknowledged that the giant insurer was struggling in the Medicare Advantage market. With around 500,000 MA members Braly said the company would probably make an acquisition to grow that market segment. "We haven't captured the market share that we could there."

By June WellPoint had scooped up CareMore. The deal added about 54,000 new MA members but WellPoint's real focus was the 26 healthcare clinics CareMore owns in Arizona, California and Nevada. The clinics, which are staffed with physicians and other healthcare professionals, specialize in delivering care coordination and intensive treatment to the chronically ill—at a profit.

WellPoint plans to add 12 CareMore clinics in 2012 at an estimated cost of $36 million and expects the new clinics to take 18 months to break even. Running the clinics means WellPoint will be more able to manage the cost of this specialized care on the front-end.

During WellPoint's third-quarter earnings call Braly said part of the strategic value of CareMore is being able to rollout the clinic model of managing the chronically ill across other business lines. "We'll take a measured approach because this is a really targeted model."

4. UnitedHealthGroup and Monarch HealthCare

OptumHealth, UnitedHealth's health services division, announced in September its plans to purchase the operations of Irvine, Calif.-based Monarch HealthCare, a 2,300 physician specialty group. Financial details were not disclosed. The move is part of United's strategy to increase its involvement in the clinical side of the healthcare delivery process in an effort to reduce costs. CIGNA, Humana and WellPoint have taken similar steps in an effort to drive the coordination of care.

Healthcare reform triggered much of this interest in acquiring physicians groups. New medical loss ratio requirements have increased the pressure on insurers to hold costs down or face huge penalties. Also, physicians will play a critical role in the creation and success of commercial accountable care organizations as well as health insurance exchanges.

5. Aetna International and Indian Health Organization

Growing middle class populations in Asia, China and India are creating important international markets for a number of U.S. health insurers, including Aetna and CIGNA. At one time the international health insurance business focused on expatriates and the executives of global companies.

Now U.S. carriers are providing health benefits coverage to the local population. Aetna International, a unit of Hartford, CT-based Aetna, announced in July that it would enter the India market by acquiring IHO and its 80,000 members. In a press statement, Derek Goldberg, Aetna's managing director for Southeast Asia, noted that more than $30 billion is spent each year in India on out-of-pocket medical expenditures. Aetna hopes to leverage the IHO acquisition to build a broader physician network and expand IHOs geographic reach.