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Consolidation wave reshapes health benefits market

Authors: Dora Judy, Eric Gallant and Mark Hillman

Overview

The health benefits market is in the midst of a mergers & acquisitions (M&A) wave. Recently announced mergers between major providers could consolidate the top healthcare providers/administrators from five to a new “top three”, with numerous considerations for both consumers and corporate benefits managers.

The Deals

  • Anthem Inc. to acquire Cigna Corp. – On July 24, 2015, Anthem Inc. announced an agreement to buy rival Cigna Corp for an enterprise value of $54B. The deal combines the current #2 and #4 providers by member count, creating new #1 with a combined member base of 53.2 million and $115 billion in revenue.

  • Aetna to acquire Humana Inc. – On July 3, 2015, Aetna announced plans to purchase Humana in a $37 billion deal which would result in combined membership of 33.5 million.

As a result of the deals, current market leader UnitedHealth will fall from #1 to #2 in membership, overtaken by the combined Anthem/Cigna entity, but UnitedHealth is not standing still, and neither are other major participants in the broader health benefits ecosystem (see sidebar – next page).This wave of M&A activity will keep health benefits managers extremely busy, as if coping with the evolving mandates of the new healthcare laws was not enough to digest. Although regulators are likely to scrutinize both deals, and neither deal is expected to close until late 2016, corporate benefits officers will want to start thinking through the potential market implications now.

Other Notable Transactions:

  • UnitedHealth Group acquired Catamaran (a pharmacy benefits manager [PBM]) for $12.8 billion.

  • CVS Health agreed to acquire Omnicare for $12.7 billion and Target Pharmacy for $1.9 billion.

  • Rite Aid agreed to acquire EnvisionRx for $2 billion.

  • Centene Corp. offered to acquire Health Net Inc. for $6.8 billion.

Considerations for Benefits Manager
At the most basic level, the market could consolidate from five major players to three. Fewer carriers/health plan administrators may mean higher costs and pricing power on the carrier/administrator side, along with potentially tighter controls on market offerings and network access to services. For buyers, sometimes consolidation can be a positive—higher spend levels can mean better negotiating leverage that drives deeper discounts with the providers (physicians, hospitals, diagnostic centers, etc.). However, in this case, more, smaller regional health systems may seek to merge or partner to create regional network Affordable Care Organizations to compete with the market power of the Big 3.

As new regional supplier offerings emerge, corporate buyers will have to monitor these shifts in the market and try to evaluate market-by-market options that best meet the needs of employees while also balancing cost considerations for the business.

Key Considerations

  • Evaluation Criteria Should Evolve: In the market consolidation scenario, employer groups and their advisors should re-examine how plan administrators (Anthem/Cigna, UnitedHealth Group, etc.) are measured. Today, more buy-side organizations are focused on ASO fees, provider discounts, and provider access and disruption. With consolidation, membership volumes across the new big three will level the playing field, reducing differentiation on the basis of discounts and network access. Outcome: evaluate which administrator can best manage your health plan, not just administer it.

  • Increased Focus on Member Behavior/Outcomes: Many employers are taking a more holistic view of total healthcare costs—and increasing their focus on wellness programs and incentives, and patient outcomes over individual procedure costs as a way to manage overall health benefits costs. With less differentiation between major networks, this focus should increase and we advise employers to intensify focus in these areas (e.g.: Wellness programs, behavioral health programs, performance-based provider contracting, centers of excellence, narrow networks).

  • Analytics and Technology Move to the Fore: Large merger integrations are a challenge for any organization, and integration of services will be a strong focus for buyers. But another area of differentiation for the administrators could be the ability to take advantage of the increasing digitization of medical information to provide better technology tools and data analytics to major customers. This will enable employers to design better programs and for their employees to better monitor their own health, and how they consume healthcare services, in order to make better healthcare decisions.

What's Next
There is no doubt that regulatory agencies will be taking a close look at these proposed deals in order to assess the potential impact on competition, customer choice, and costs. The proposed merger will have to secure approval from the United States Justice Department, the Federal Trade Commission, and state insurance regulators, and the timelines for these approval processes are extremely difficult to predict. As the regulatory approval process moves forward, don’t be surprised to see further consolidation among ancillary carriers and administrators as large and mid-sized players look to round out their portfolios of services.

Key Action

Although the Anthem/Cigna deal is not expected to close until the second quarter of 2016, now is a good time for corporate benefits teams to spend time analyzing their organization’s geographic footprint (and how it lines up with these new networks); employee populations (to understand projected healthcare benefits demand); and weigh which factors are most important (for example, breadth of network access, cost, scope of services, technology and analytics, etc.). In current and near-term bid processes, start asking major providers about the value proposition of the proposed mergers. These exercises will arm your organization to be in a position to take a proactive stance in negotiation with the potential new “big three” rather than reacting to the new reality.

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