UnitedHealth Deal to Buy XLHealth Is Said To Be High Priced

UnitedHealth Deal to Buy XLHealth Is Said To Be High Priced, Mainly About Dual SNPs (with Chart: XLHealth’s Care Improvement Plus MA Plan Averages 39% Annual Growth)
Reprinted from MEDICARE ADVANTAGE NEWS, biweekly news and business strategies about Medicare Advantage plans, product design, marketing, enrollment, market expansions, CMS audits, and countless federal initiatives in MA and Medicaid managed care.
December 1, 2011 Volume 17 Issue 23
In the latest and perhaps most costly Medicare Advantage acquisition this year in terms of price per member, UnitedHealth Group on Nov. 22 unveiled an agreement to acquire XLHealth Corp. While the two companies did not disclose the price in the all-cash deal, Bloomberg reported that a source familiar with the transaction said it was about $2 billion, which would put the price per member at above $17,000. That would be far higher than the estimated $10,000 per member in the recent Cigna Corp. deal to acquire HealthSpring, Inc. (MAN 10/27/11, p. 1) and even above the estimated $15,000 WellPoint Inc. agreed in June to pay for CareMore Health Group (MAN 6/16/11, p. 3).
There are, however, some particular reasons XLHealth was able to garner such a high price, sources tell MAN. One is that there apparently were multiple deep-pocketed insurers interested in the sale process run for the privately held company by investment banking firm Jefferies Group Inc. Second, XLHealth has demonstrated increasing success, as shown by a steadily improving profit margin and strong revenue and enrollment growth (see chart, p. 7), in running MA Special Needs Plans (SNPs). Third, XLHealth’s skills in managing SNPs for Medicare-Medicaid dual eligibles, in particular, will help United in what is expected to be explosive growth of managed care for duals.
“United likely views XLHealth as a platform to launch a more comprehensive offering for dual eligibles over the next few years,” says analyst Carl McDonald of Citigroup Global Markets in a Nov. 22 research note.
Duals Attract United to XLHealth
“I think the story is the centrality of the duals to the business plans of many health plans,” agrees Nathan Goldstein, executive vice president of consulting firm Gorman Health Group, LLC, which has done work for XLHealth for several years. He tells MAN that XLHealth “was an early adopter of the very best risk-adjustment strategies” and has been an innovator in managing and marketing to chronically ill and poor populations.
But it has been a convoluted and difficult journey for XLHealth to have gotten to this point of market leadership in the growing SNP field.
The Baltimore-based company began as a disease management (DM) firm, then known as Diabetex, in 1998. Its focus from the start, XLHealth Executive Vice President Paul Serini stresses, has been “management of chronically ill Medicare beneficiaries, particularly those with diabetes and heart failure.” The firm’s first contracts as a “fee-based” DM and care management services provider began in 1999, and it then adopted the name XLHealth.
As was the case for many other DM firms, it was difficult for the company to grow strongly and profitably in just that field. So XLHealth started health plans, and its first Care Improvement Plus SNP for chronic conditions began in 2006. “In the 2010 plan year we expanded our product line to include dual Special Needs Plans and traditional Medicare Advantage plans,” Serini notes.
The company now serves about 113,000 MA members in Arkansas, Georgia, Maryland, Missouri, South Carolina and Texas, about 12,000 of them in dual SNPs, the company notes (MAN 11/10/11, p. 2), up sharply from 7,826 at the end of 2010. And it will add six states — Illinois, Indiana, Iowa, New Mexico, New York and Wisconsin — to its SNPs in 2012, when XLHealth expects its revenues to exceed $2 billion, states the news release announcing the deal, which is expected to close in the first half of next year.
Company Moved to Profitability This Year
Figures in a Nov. 22 research note from Goldman Sachs & Co. securities analyst Matthew Borsch and drawn from state insurance reports show the company had revenues of $628 million and a net loss of $72 million in 2007. That’s the year when private-equity firm MatlinPatterson Global Opportunities Partners III LP bought a majority interest in the firm, which also has substantial management ownership. In 2008, revenues shot up to $1.12 billion, although the net loss widened to about $90 million, the Goldman Sachs figures show. The loss, though, narrowed substantially in 2009, and the company posted net income, Goldman Sachs says, of about $62 million and revenues of $917 million for the first two quarters of 2012.
Serini declines to confirm or deny either those or McDonald’s figures and analyst estimates of the purchase price “at this time.”
Asked why the company decided to sell now versus years ago or in future years, Serini tells MAN, “XLHealth’s ongoing goal has been to grow its capabilities and expand its reach. UnitedHealthcare recognizes the value of the care management model XLHealth has built, and seeks to build on the XLHealth model of care to better serve Medicare Advantage members in markets across the country. For those reasons, it was logical timing for both organizations to form this union.”
That leaves the question of whether XLHealth’s highly regarded management team — headed by Chairman and CEO Fred Dunlap, who has a consulting as well as health plan executive background, and Serini, who has been there since the company’s early days — will stay after the acquisition closes. Serini’s response on this question is just that “UnitedHealthcare has expressed that they are looking forward to working with our leadership, and we share that enthusiasm.”
It is interesting, says Gorman Health Group’s Goldstein, that XLHealth is selling to a large health plan operator rather than to “private equity.” He suggests this is partly a reflection of price and partly that the acquirer wants XLHealth to teach it the SNP management business. And from a prospective seller’s standpoint, he adds, “this is the moment to sell,” especially since “this industry is consolidating very, very quickly.”
Praising the company’s understanding of risk adjustment, in which it was an early user of algorithms developed by Leprechaun, LLC, Goldstein says the deal with United “was about the duals.” The growth in the number of duals and the opportunities for managed care in those populations, he predicts, will be explosive, beginning now but particularly after the Medicaid expansion under the health reform law starts in 2014.
Duals are especially difficult to manage since they’re “claims and transaction intense” because of not only their poor health status but also difficulties in communicating with them, he adds. Health plans need to be very “hands on” in their care management with this population, according to Goldstein, and United in the XLHealth deal is buying the “know-how” for dealing with that.
However, only 11% of XLHealth’s membership now is duals, while the vast majority of the rest is in chronic care SNPs. Securities analyst Scott Fidel of Deutsche Bank estimates that the company has a 53% market share in chronic SNPs and about 8% of the total SNP market, which is dominated by dual SNPs in terms of enrollment.
The difficulty of this market shows through in some of the operating figures securities analysts point to for XLHealth. The company’s selling, general and administrative ratio, for instance, is in the unusually high “mid-teens” after being a lofty 18.3% in 2009, says McDonald, but that could go down to 10% as a result of economies of scale stemming from the United purchase. XLHealth’s medical loss ratio was a high 94.7% as recently as 2008, he notes, but since then it generally has declined, to 82.8% last year and 77.7% for the first half of 2011.