Article

M&A Back on the Agenda: Not Just Growth – Survival

By 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.