What Is The End Game For The Health Insurers? Here Is Our Opinion

Jul 21, 2015

What Is The End Game For The Health Insurers? Here Is Our Opinion

Healthcare Newsletter, Newsletter 0 Comments

There are many reasons companies engage in M&A activity. Achieving revenue or cost synergies usually tops the list. But more and more we are seeing companies use M&A to transform their business all together.

In the case of Aetna’s $37 billion acquisition of Humana, the financial reasons are obvious. The combination creates a company with revenues of $115 billion and over $3.0 billion of cash flow; with a goal of generating $1.2 billion of synergies by 2018. Together the companies will create the second largest managed care company by revenue and bringing together Humana’s growing Medicare Advantage business with Aetna’s portfolio of commercial capabilities. But this transaction is driven by more than the financials- it may well be about survival in a fast changing world. There is no doubt in our mind that the deal will spur further M&A activity in the sector. The last remaining big guns, namely United, Cigna and Anthem, are bound to make their own moves quickly.

One of the main reasons cited for the quickening pace of consolidation among health insurers is the burden imposed by Medical Loss Ratio (regulations penalizing insurers who spend more than 15-20% of premium dollars on administrative costs). It is a well understood fact that many insurers still exceed that limit; weighed down by legacy IT and inefficient processes. Clearly, these companies must consolidate to wring out the excess cost from the system and get on the right track.

As the industry reorganizes itself, the scale alone will not make these firms competitive. Now that the Supreme Court has upheld a critical part of ACA, the battle over “Obama Care” has largely ended. In our opinion, the land-grab for profits is about to shift to highest gear and these mega firms need to take advantage of new business models afforded by disruptive force of technology or else they will be marginalized by the more nimble and creative companies overtime.

Lets look at some examples. OSCAR, a health insurance start up, has raised over $300 million of capital from the best known investors. The company is representative of how a health insurer can use technology to make healthcare simple and intuitive. We are not aware of any of the traditional players that can come close to OSCAR’s ability to use technology to make the entire process from enrollment through claim management smooth, easy and efficient.

Another example is how providers are using the latest analytics techniques in measuring and taking risk. Although we are in the early days of embracing population health management and outcome based reimbursements, these tools will increasingly make providers comfortable in shouldering more clinical risk for better pay out. The fact that some providers are dipping their toes in the insurance business reinforces this trend.

As provider organizations are more and more wiling to assume the risk of clinical outcomes, we envision a day that the role of most health insurers will be limited to lending “risk capital” to those organizations and perhaps marketing insurance services on their behalf. We have ways to go to get there and the industry needs to see some transformative deal making first, but the first season of Game of Thrones has already begun.

To read the rest of our July H.I.T. Greatest Hits, please click here

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