Health Plan Transactions: Trends and Issues

Health Update

Editor’s Note: The number of healthcare transactions reached a record-smashing 1,738 in 2018.1 According to a new Capital One poll, mergers and acquisitions are the preferred growth vehicle for 44% of healthcare executives in 2019, indicating that we will continue to see M&A on the rise. What are the trends driving the growth in healthcare transactions? What are the new M&A strategies remapping the healthcare landscape? In a recent webinar, Manatt Health shared the answers. In part 1 of our article summarizing the webinar, published in our April “Health Update,” we examined the major healthcare trends fueling the changes in healthcare M&A. In part 2, published in May, we shared a deep-dive look at provider transactions. Part 3 of our summary, below, provides an in-depth analysis of health plan transactions. Click here to view the full webinar free, on demand—and here to download a free copy of the presentation.

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Trends Driving Health Plan Transactions

There have been a number of health plan transactions over the past year, but we’ve seen a shift in the types of deals. In 2017, health insurers were focused on horizontal integration, but those efforts met regulatory roadblocks due to antitrust concerns. As a result, health plans turned to vertical integration, where antitrust barriers would be less significant. They moved from strategies built on growing their market share only within the insurance sector to strategies that would help them gain control of the delivery system and supply chain that are integral to the insurance business. As a result, we’ve seen growing momentum around insurer-provider joint ventures, though those can face barriers, as well.

Health Plan Consolidation Faces Antitrust Hurdles—but Medicaid Can Present Opportunities (and Challenges)

Health plans seeking to consolidate have faced antitrust hurdles. In January 2017, the proposed Aetna-Humana merger was blocked by the court after the Department of Justice (DOJ) sued to stop the merger. The following month, the proposed Cigna-Anthem merger met a similar fate.

Although the Aetna-CVS merger was not blocked by the DOJ on antitrust grounds, it really is primarily a vertical rather than a horizontal merger. In addition, to move forward, the DOJ required that Aetna divest its Medicare Part D business to WellCare. (Both Aetna and CVS were significant participants in the Medicare Part D market). Therefore, although the merger was not blocked on antitrust grounds, it does support the general principle that there is significant suspicion and scrutiny of any horizontal integration, even when the areas of overlap are just a small component of the full transaction. (On June 4, the Aetna-CVS merger also faced an unprecedented Tunney Act review hearing, with oral arguments scheduled for July 17.)

The one area that may present opportunities for consolidation without raising major antitrust concerns is the Medicaid managed care market. There is less concentration in Medicaid managed care, in part because it’s a state-by-state program—and states differ significantly in their participating plans. For example, in some states, provider-sponsored plans play a major role, while in others large national insurers dominate. As a result, Medicaid managed care has a lot more dispersion of market share and, therefore, fewer antitrust barriers than the Medicare and commercial markets.

There are, however, other potential political and regulatory obstacles. A good example is Centene’s $3.75 billion acquisition of Fidelis, announced in September 2017. Fidelis was a large Medicaid managed care plan that had more than 1 million members and was affiliated with the Catholic Church in New York. When the transaction was announced, there were no regulatory barriers, as long as the proceeds from the deal went to a charitable foundation, because Fidelis was a tax-exempt health plan.

Shortly after the deal was announced, faced with budget pressures, the Governor of New York introduced a proposal for a “public asset fund” that would effectively capture 80% of the Fidelis transaction proceeds. The following month, there was another legislative proposal advanced that would allow the state to claw back the “excess reserves” of not-for-profit Medicaid plans. Both of those initiatives were triggered by the announcement of the Fidelis-Centene deal—and the state’s interest in securing a portion of transaction money to help close the state’s budget gap.

After an intense lobbying effort and significant negotiation, there was a resolution that allowed Centene to close the deal. Fidelis transferred $3.2 billion to a foundation that was established by the church. The New York State fund received $2 billion, based on the threat of more restrictive legislation.

As the Centene-Fidelis example illustrates, while Medicaid transactions may not face antitrust hurdles, they can be more sensitive from a political standpoint. Centene’s planned $17.3 billion acquisition of WellCare—which it still expects to close in the first half of 2020—is undergoing scrutiny. (After the webinar, on May 22, the company announced that it had received requests for additional information from federal regulators.)

Insurers Pursuing Vertical Integration

Outside of a few limited examples, insurers are largely focusing on vertical integration in lieu of horizontal integration. Insurers have set their sights primarily on three types of organizations:

  • Pharmacy benefit managers (PBMs) and pharmacies, with examples including CVS’s $69 billion acquisition of Aetna, which closed in November 2018, and Express Scripts’ $67 billion merger with Cigna, which closed in December 2018
  • Long-term care providers, with examples including Humana’s acquisitions (through a joint venture with TPG Capital and Welsh Carson) of Kindred at Home for $4.1 billion and Curo (one of the country’s largest hospice providers) for $1.4 billion, with both closing in July 2018
  • Medical groups/independent practice associations (IPAs), with examples including Optum’s $4.9 acquisition of DaVita Medical Group, announced in December 2017 (with the closing still pending at a reduced price of $4.35 billion), as well as Humana’s purchase of a sizable Florida practice, the Family Physicians’ Group, which closed in April 2018

Vertical Integration Gives Health Plans In-Person Touch Points

There is a common thread running through all these deals. Health plans are seeking touch points that enable them to engage with their members and interact with communities. This new level of connection gives them a greater ability both to deliver services and to affect members’ behaviors.

In the CVS-Aetna deal, Aetna now has reach into a vast network of local retail outlets accessible to its members, even those in rural areas. The merger brings the opportunity to refashion stores as healthcare hubs with retail clinics and other services focused on prevention and care management.

The Humana-Kindred deal brings care home to medically-fragile members and uses technologies (such as remote monitoring and telehealth) to enhance the scope of available services. The service offerings are particularly well-suited to Medicare and dual eligible members who may have difficulty accessing care.

The Optum-DaVita Medical Group deal aligns physician incentives with the plan’s quality and cost-effectiveness goals. It also allows Optum to use its physician network as a differentiator that sets it apart from its competitors.

Potential Regulatory Challenges Following Vertical Integration

There are significant regulatory issues involved in bringing payers and providers together under common ownership. It is important to structure the financial relationships between payers and providers carefully to avoid kickback and other fraud and abuse claims.

There also can be concerns around data sharing, so it is critical to ensure compliance with the Health Insurance Portability and Accountability Act (HIPAA) and other privacy laws. Organizations coming together can mistakenly believe that once they are under common ownership, they can function as one entity. The way the HIPAA rules are structured, however, health plans and providers are separate covered entities for purposes of disclosing information. This holds true even if they are affiliated and elect to be treated as a single covered entity. Therefore, combined organizations need to be cautious when considering the kinds of data sharing that are permissible.

In addition, there are business challenges when bringing together payer and provider organizations. Providers are historically focused on fee-for-service billing and volume generation. Their operations typically have to be re-engineered to align with health plan goals around increasing value and controlling utilization. It can be a complicated process to harness the provider’s resources to support the plan’s objectives without alienating the provider’s other customers, such as other insurers with which it does business.

The Elimination of Independent PBMs

The major deals completed in 2018 have resulted in the virtual elimination of the independent PBM model. There are some smaller PBMs, but the big players have been purchased in a series of major deals, including:

  • CVS’s $12 billion acquisition of Caremark in 2006
  • Express Scripts’ $29 billion acquisition of Medco in 2012
  • Optum’s $13 billion acquisition of Catamaran in 2015
  • Aetna’s $69 billion merger with CVS Caremark in 2018
  • Express Scripts’ $67 billion merger into Anthem in 2018

These mergers share a common set of goals, including:

  • Cutting costs through control of the supply chain;
  • Creating insurer access to PBMs;
  • Building more diversified revenue streams;
  • Enhancing access to timely and usable data through both provider portals and insurer portals; and
  • Defending against potential market disruptors, such as Amazon.

Joint Venture Activity: An Alternative to Acquisitions

In the past few years, there has been a renewed interest in insurer-provider joint ventures (JVs), as an alternative to acquisitions. The focus of the JVs varies. For example, the Tufts-Hartford JV in Connecticut is focused on Medicare at this point. In other states, JVs have had more of a commercial focus. In all cases, however, a health system and a health plan are coming together to create a new entity, jointly owned by the two parties.

One of the primary drivers of the growth in JVs is the increasing emphasis on value-based purchasing that triggered the need to align payer and provider interests. The move to full risk sharing then made it an easy leap to joint ownership, since the process of re-engineering the hospital system to align with the insurance-based reimbursement approach had already begun.

From the hospital standpoint, JVs offer a way to capture more of the health plan’s premium dollars. Hospitals also benefit from lower capital requirements and less risk than sole ownership.

For health plans, JVs can be a market differentiator, particularly if they are partnering with a health system that has a strong market position in the local community. By cobranding, the health plan can benefit from the hospital’s good standing and reputation for quality.

Finally, JVs offer the opportunity to use reinsurance for risk sharing in Medicare Advantage. In prior years, a hospital might start a plan and then look for reinsurance from a health insurer willing to share some of the risk. With CMS now taking the position that quota share reinsurance is not permissible in Medicare Advantage, that model is blocked, making joint ownership more attractive.

Risks and Challenges of JVs

One of the major obstacles to a successful payer-provider JV is the potential resistance within hospital systems to thinking like insurers rather than providers when delivering care. There has to be a culture change within the hospital, and that can be a difficult transition. The 50/50 governance model can lead to deadlock, if health system executives can’t start viewing themselves as being part of a health insurance company.

If hospitals and doctors are exclusive to the health plan, there also could be potential antitrust issues raised. It is important to consider if the joint venture’s market share is significant enough to raise antitrust concerns. It is also critical that financial arrangements between the partner organizations are managed to avoid any possible kickback liability.

Finally, the greatest challenge, particularly in the Medicare Advantage area, could be in risk adjustment coding. Hospital ownership of an insurer is likely to heighten scrutiny of risk adjustment coding practices.

Due Diligence Issues in Health Plan Transactions

There are several key due diligence issues to consider when health plans are entering into horizontal transactions. It is important to be sure that the buyer has the licenses and government contracts necessary to operate in all relevant service areas. Transactions involving Medicare can pose added challenges, particularly if there is an attempt to sell part of the Medicare business, since CMS has a “partial novation” restriction on Medicare Advantage plans. As a result, there often may need to be restructuring to deal with Medicare issues.

When conducting due diligence for a horizontal transaction, it is also critical to consider if the potential partner has any False Claims Act or other regulatory liabilities, such as pending subpoenas or Civil Investigative Demands (CIDs), as well as any current audits, self-disclosures or hotline complaints. In addition, it is key to assess the assignability of key contracts with providers, as well as with PBMs, IT vendors and other business partners. Finally, those considering the transaction should assess the likely regulatory approval process and potential hurdles from CMS, state insurance and Medicaid agencies, and the DOJ. To be complete, the assessment should include a review of the political landscape and a look ahead at additional regulatory concerns that may be raised when the deal is announced.

1 S&P Capital IQ.