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The Nolan Company is pleased to bring our readers
a special series of new articles covering the surprising
opportunities and the risks of these turbulent times. In each of
the coming weeks, we will share our insights and experiences in
managing toward the upside during a time of unique market
dynamics.
M&A Back on the Agenda: Not Just
Growth - Survival
Merit
Smith
Vice President and Health Care Practice
Director
2008 has been a
tough year for health plans. Early in the year, the major health
plan systems lost half their market capitalization as investors
worried about their ability to maintain earnings growth in a
softening economy. This slaughter was followed by modest membership
growth and weak earnings. And then the impact of the liquidity and
credit crisis hit health plans, and things got even worse. Then, to
top it all off there was the uncertainty of the election.
In fact, some health plans have not survived 2008. Regulators
kicked in and these plans have been seized and merged into stronger
plans. There have been a few voluntary mergers this year. From what
we know these combinations are not driven by the liquidity and
credit crisis but are part of longer-term strategic initiatives that
just happened to occur this year.
Recently when working with a regional client on a liquidity
problem, we were asked to speculate what the major health carriers
will be doing as a result of the changed financial environment. Our
client inquired, "Are they going to be buying health plans? Or, are
they going to be selling their health plans?" Our response to this
was, "They will likely do a little bit of both…"
Our client had a regional health plan executive's viewpoint
of large national HMO chains. Regional health plan executives tend
to see national managed care organizations as merely groups of HMOs
with common ownership and branding. In this mental model, it makes
sense to think of a national organization as responding to a
financial crisis in terms of buying or selling health plans.
We see the national managed care players as organizations
that own and manage a portfolio of capabilities. (The local health
plans are the distribution channels for these capabilities to
specific markets.) Some of their capabilities are traditional skills
like utilization management, but other capabilities are represented
by specialty organizations like PBMs or technology companies, or
even companies that manage "intellectual property." A national
strategy then involves emphasizing or deemphasizing different mixes
of capabilities and distribution channels.
Health plans are going to be more or less owned by who owns
them today. Keep your eye on a more subtle game of how the national
players (and a few large single-region players) change the mix or
emphasis of their portfolio of capabilities. Perhaps you might see
some players who have been making major efforts to bring
consumer-directed health care to the market become more selective in
which markets they are pursuing. Or, you might see a national
carrier with strength in ASO business push their capabilities down
into the mid-size employer market. With the election, some carriers
may downplay their involvement in Medicare Advantage markets.
So, we are expecting to see the large nationals rebalance
their portfolios' capabilities and tune distribution channels as
they seek to avoid risk and seize new opportunities. It is too soon
to tell if that means there will be significant buying or selling of
HMOs as a response to the financial crisis. In times of uncertainty
(all other things equal) maintaining your distribution channels
makes sense. But all things are not equal, especially the
profitability of some small plans owned by national players. Small,
unprofitable plans affiliated with national organizations may be a
category where we might see some buying and selling of plans. Time
will tell.
Speaking of companies dealing with the financial crisis,
Nolan recently polled our clients and consultants. We wanted to hear
the issues, implications, and initiatives they are considering as
they respond to the rapidly evolving financial environment. The
result is a practical snapshot of how managed care executives are
dealing with a complex and dynamic set of problems. Want to read the
report? Go to Responding
to the Financial Crisis–Today's High Priority Health Care
Issues. You may also e-mail me at merit_smith@renolan.com
or call me at 800–248–3742.
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