Does Cigna’s Planned HealthSpring Buy Signal More Managed Care M&A?

By Jonathan Block - October 26, 2011

 

Even though health insurers are always looking for ways to add new members, it surprised many on Monday when Cigna Corp. announced it would buy Medicare managed care provider HealthSpring, Inc. in a $3.8 billion deal. The move gives Cigna 340,000 Medicare Advantage (MA) members, as well as 700,000 customers from HealthSpring’s Medicare prescription drug business.

Most analysts and industry observers have lauded the deal so far. Why? MA represents one of the largest growth areas for health insurers in the coming years. Commercial business is likely to lag in the future as rising health care costs are causing some employers to drop health insurance coverage for their workers or shift more of the expenses onto them, while the number of Americans eligible for Medicare is expected to increase significantly.

Although MA accounts for only 25% of overall Medicare enrollment, that figure is expected to increase, according to Jefferies & Co. analyst David Windley. Wedbush Securities analyst Sarah James adds that 50% of Medicare enrollees could be in managed care plans in the next five years.

Several analysts noted that more Medicare-focused providers (e.g., WellCare Health Plans, Inc. and Universal American Corp.) could be in the sights of other large insurers. “This may signal a renewed wave of consolidation, especially for commercial-focused plans to increase government exposure,” wrote Credit Suisse analyst Charles Boorady.

Along similar lines, Citigroup Global Markets equity analyst Carl McDonald said, “The deal should have positive implications for the other smaller players in the industry…as there are still a few larger plans in the industry that want to become bigger Medicare players,” adding that there are relatively few Medicare plans with more than 50,000 lives.

But it’s not just Medicare-focused companies that could be up for grabs. Yesterday. Amerigroup Corp. said it would buy Health Plus, one of the largest Medicaid managed care providers in New York with 320,000 members, for $85 million. And today, Coventry Health Care, Inc. said it would buy Children's Mercy's Family Health Partners, gaining 210,000 Medicaid members in Kansas and Missouri. Given the move by many states recently to have HMOs handle Medicaid administration, could Centene Corp and Molina Healthcare Inc. be next?

Buoyed by strong earnings over many quarters, most health insurers are flush with cash, though the uncertainties of health care reform has led most of them to hold off on large-scale M&A activity. However, given Cigna’s move and the growth Medicare and Medicaid represents, do you think insurers might start opening up their wallets more?