Tuesday, June 20, 2017

Death of Merger Mania Gives Way to New Reality for Health Plans’ Growth Strategies

Reprinted from HEALTH PLAN WEEK, the most reliable source of objective business, financial and regulatory news of the health insurance industry. 
February 20, 2017 Volume 27 Issue 7
With Aetna Inc.’s deal to buy Humana Inc. dead and Anthem, Inc. and Cigna Corp. waging a court battle over their failed merger, health plan industry watchers say it’s safe to presume the four companies are drawing up new growth strategies, possibly by targeting smaller insurers active in the Medicare Advantage (MA) segment such as provider-sponsored plans. There also may be interest in reaching into the PBM, technology or cost-management businesses to diversify, emulating UnitedHealth Group and its Optum unit.
Another question is how they will seek to refocus after what has not only been a gigantic money drain for the failed acquirers Aetna and Anthem (with some $2.85 billion in payouts), but also a colossal distraction that has kept the carriers from innovating in their core businesses.
How quickly the insurers move on to new M&A targets or — in the case of Cigna and Humana — decide to allocate cash from their failed suitors depends on the company. Aetna and Humana mutually decided on Feb. 14 to end their courtship, freeing each for what comes next.
In comments on that agreement, Scott Fidel, securities analyst for Credit Suisse, said the move was expected given the lack of enthusiasm for appealing the Jan. 23 federal court ruling (HPW 1/30/17, p. 1) siding with the Department of Justice in striking down Aetna’s purchase of Humana. “With the formal termination of the deal, Aetna will pay Humana a $1 billion breakup fee…and has canceled plans to sell certain Medicare Advantage [MA] assets to Molina [Healthcare, Inc.],” he wrote in a Feb. 14 note to investors.
Cigna Seeks $13B in Damages
On the flip side, the contentious Anthem-Cigna coupling remains so, with Cigna on Feb. 14 filing suit against Anthem (Cigna Corp. v. Anthem Inc., 2017-0109, Delaware Chancery Court) seeking not only the $1.85 billion break-up fee, but a whopping $13 billion in damages. Anthem struck back, countersuing (Anthem Inc. v. Cigna Corp., No. 2017-114, Delaware Chancery Court) to keep the merger deal alive, and on Feb. 15 won a court ruling temporarily blocking Cigna from ending the transaction until at least an April 10 hearing to address the matter.
At issue is whether the two insurers will appeal the Feb. 8 federal court order rejecting their deal on antitrust grounds (HPW 2/13/17, p. 1). Anthem is in favor of a so-called “fast-track” appeals court review by an April 30 deal deadline, but Cigna is pushing for termination.
Wall Street analysts said the court jockeying wasn’t surprising, given the drama throughout the failed merger process. “There is clearly no love lost between the two companies and we can only hope some amicable resolution can be found versus a court process, and for both companies to move on. That said, we don’t have much conviction the $13 billion suit will succeed,” said Ralph Giacobbe, securities analyst for Citi, in a Feb. 15 note.
Moving forward, presuming that both deals are dead, industry consultants say there are many new roads, starting with buying a smaller insurer. Much speculation has focused on Centene Corp. or WellCare Health Plans, Inc., since both are heavy in the Medicare and Medicaid segments, with MA-focused insurers an especially ripe option.
Bill DeMarco, principal at Pendulum HealthCare Development Corp. in Rockford, Ill., tells AIS Health that MA is an appealing market given the favorable payment structures in place, the popularity of the program with seniors and even more growth expected based on demographics and likely policy decisions. Along with MA targets, provider groups could be an M&A “wild card.”
“It is the conversion of some of these ACOs [accountable care organizations] to physician-owned health plans or provider-sponsored health plans. We are seeing a lot more activity there this year,” he says. “Part of it I think is the ongoing discussion on value-based payment. Employers are starting to get it.” An employer, for example, might opt to work with a health system that has an ACO model, share the risk and create some sort of a fixed-price or value-based contract, he says.
Aetna, Anthem, Cigna and Humana also might try to mirror what UnitedHealth Group has built with its money-churning Optum unit, which would mean looking outside of the traditional health insurance sector for purchases. While its rivals have been focused on acquisitions and court battles, UnitedHealth has been making precision deals such as one to build its OptumRx pharmacy brand through the $12.8 billion purchase of the PBM Catamaran in 2015 (HPW 4/13/15, p. 1) and OptumCare’s agreement to pay $3.2 billion for Surgical Care Affiliates Inc., an outpatient surgery provider (HPW 2/13/17, p. 1).
Potential buys could include PBM Express Scripts Holding Co.; Envision Healthcare, Inc., an ambulatory surgery company; HealthSouth Corporation, a rehabilitation and home health specialist; behavioral health care leader Magellan Health Inc.; cost management software vendor Evolent Health LLC; and telemedicine concern Teladoc, Inc., according to a recent Bloomberg article.
But such options might not be a clear win for insurance carriers, says David Williams, co-founder of Boston-based consulting firm Health Business Group. “It is not like in pharma with lots and lots of players where if a deal does not work out you can do another,” he says. Right now, it is time for the insurers to step back and figure out “Plan B” strategies.
But first off the insurers, like the rest of the industry, will be trying to make sense of what happens with the ACA rewrite. Beyond that, Williams predicts an attempt by carriers to vertically integrate and invest more into the provider space. “This would be the hope of controlling costs a little bit better,” Williams says. “They could get involved in primary care or telemedicine.”
Technology companies also might be in play, again with the telemedicine space being a prime target. “Remote care in general may be there, and so could companies in analytics, and there may be interest in devices and wearables,” he adds.
Anthem-Cigna May Have Another Chapter
Another possibility — albeit one not getting much attention — is that the Anthem-Cigna combination could still happen. Ash Shehata, a KPMG partner who heads advisory services for U.S. health plans, tells HPW that with the Trump administration in charge and all of the change nearing for the ACA, there is a chance that a reworked Anthem-Cigna could be more attractive. “Stay tuned. I don’t think this is done yet,” he says. “From what I am hearing, the organizations could definitely try and see what kind of political appetite there is to review this decision.”
With the ACA overhaul, the insurance sector is likely to win more freedom to change and price products with less regulatory oversight. “If you think about the changes that have been contemplated, it will be good for plans,” Shehata says, giving as an example proposals for more flexible age-rating bands to attract younger people to individual markets, as well as tighter enrollment rules and fewer essential health benefits (see story, p. 3).
With these changes in play, the size and scale argument for mergers would gain more credence. “Most of the plans pulled out of the exchanges, and you had these mergers on the table. But these mergers did not look like they were going to drop the prices and they were going to basically reduce competition. So that was not a good landscape to go into,” he says. “If you reshuffle the deck chairs again, plans change, a new ACA, new leadership in the White House, and then I think these deals could be revisited and I think that is what is going to happen.”
Shehata says despite the harsh feelings between Anthem and Cigna, the option to move forward is still there. “It clouds it but it does not remove or inhibit them from trying to close this deal under a new administration. All plans will be running as if they are going to be independent entities for a while.” He notes that the Anthem-WellPoint merger took four years to close.
DeMarco takes the opposite view, saying the feds made such a solid case against the Anthem-Cigna and Aetna-Humana combinations that it would be hard to get a positive appeal even with the Trump administration in charge. “You would get two bigs getting even bigger and then they could be bought [by UnitedHealth]. They would all be too big for their britches and could tell CMS [Centers for Medicare & Medicaid Services] what to do [like in the MA market],” he says.
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