Health & Medicine, Monday, May 10, 2004

More Deals Expected As Big Health Plans Look To Get Bigger


When people are poor, they rent studio apartments and eat 65-cent burgers. Once they get a little money saved up, it's a house in the burbs and steak on the grill.

Health insurers behave similarly. Four or five years ago many watched sales and profits plunge, so they shed businesses and cut costs.

But in recent years, revenue and profit have grown, and insurers are expanding again. Last fall, major health insurers started announcing the first of what analysts call a string of upcoming mergers.

Size has a lot to do with it. The bigger you are, the lower your back-office costs - and the better your ability to negotiate discounts.

"This is an industry where economies of scale are very important," said UBS analyst William McKeever. "The key to success is to have the best discounts with doctors and hospitals." 

The latest deal was made public in late April, when Minnetonka, Minn.-based UnitedHealth Group (UNH) announced plans to buy Oxford Health Plans (OHP) of Trumbull, Conn.

That announcement followed United's February purchase of Mid-Atlantic Medical. After the Oxford deal closes, United will boast 20.1 million members and rank No. 2 in the industry.

The top spot is reserved for the company that forms when Indianapolis-based Anthem (ATH) completes its merger with Thousand Oaks, Calif.-based WellPoint Health Networks. (WLP) 

Their $16.4 billion deal, expected to close midyear, will turn the joined Blue Cross and Blue Shield companies into the country's largest health insurer. The merged firm will be called WellPoint and have $27 billion in assets and cover 26 million people in 13 states.

This leaves Aetna (AET) in third place with 13.3 million members and Cigna in fourth with 10.2 million.

A March report from Merrill Lynch says large insurers will target regional health plans such as Coventry Health Care, (CVH) First Health Group (FHCC) and Health Net. (HNT) 

Beyond the financial clout that comes with being bigger - large plans can demand that doctors and hospitals accept lower prices in exchange for their medical services - mergers also help health plans save money by eliminating redundant data processing and corporate staff.

They also give companies national reach, meaning they're in a better position to serve large corporations with employees scattered across the U.S.

Glenn Melnick, senior economist at Rand Corp. and head of health care finance at the University of Southern California, says there's another reason big health plans are merging: They need to get their tech houses in order. 

"Cost reduction won't be nearly enough to justify (WellPoint and Anthem's) $16 billion price tag," he said. "What they're betting on is that they'll have almost 30 million subscribers and growing. That will let them invest billions into a next-generation information system."

He says current information technology systems aren't set up to fully serve patients, who are asked to make more decisions, pay more out-of-pocket costs and choose their doctors and hospitals. 

"Suppose your doctor says you need a hip replacement," Melnick said. "The health plan of the future will offer you a Web site where you can look up the 20 hospitals in your plan and look at their hip replacement (success rates)."

The site will detail what your insurer will pay, your out-of-pocket costs and your expected recovery time.

"It'll have all the information you now get when you're planning a vacation," Melnick said.

The systems won't come cheap. Melnick estimates each large insurer will spend billions of dollars to install them.

Nonprofit Kaiser Permanente, the fifth-ranking health plan with 8.2 million members, already has spent more than $1 billion just trying to organize clinical and patient information in California.

Big players will have advantages over their smaller peers when it comes time to set up new information systems.

The reason: It costs just as much to build such systems for 20 million members as it does for 30 million members.

Industry watchers expect more deals over the near term.

With the exception of Cigna - which is still working on improving internal operations and systems - the others are ready to make acquisitions, says Ken Abramowitz, a managing general partner at New Global Network, a private equity investment firm in New York. He estimates that Cigna is two years behind.

"In the average state, the Blue Cross plans, United, Aetna and Cigna together control about 50% of the market," he said. "There's opportunity for them to gain the other 50% by winning new members or acquiring them."

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