By Verena Kallas
The recently announced purchase of XLHealth is the seventh this year involving companies that manage Medicare coverage. Unlisted XLHealth will be acquired by UnitedHealth Group (UNH) for about $2 billion in cash.
XL Health was also being chased by WellPoint (WLP) and Aetna (AET), as each of these major insurers is trying to gain more Medicare Advantage (MA) customers. MA, a federal program in which commercial insurers sell managed-care plans to Medicare beneficiaries, provides an alternative to the original Medicare fee-for-service system.
Nearly 12 million people are currently enrolled in Medicare Advantage plans. MA enrollment has increased by 75% since 2006, outpacing retiree market growth. The MA business is expected to continue growing over the next five years due to increasing support from the federal government, for which outsourcing to managed care is a cost containment strategy.
The biggest private health insurers already have many Medicare customers, but are trying to add more. UnitedHealth, the largest U.S. health insurer by sales, has over 7 million Medicare clients. Humana (HUM) is second with 4.3 million and WellPoint is third with 2.6 million. They are followed by Aetna with about 837,000 Medicare clients and Cigna (CI) with well over half a million.
Cigna’s $3.8 billion purchase of HealthSpring (HS), which is expected to close during the first half of 2012, was at least partly motivated by the addition of 1.17 million customers served by Medicare. The acquisition of Inspiris by UnitedHealth at the beginning of this year, and the purchase of CareMore Health Group by WellPoint in June, were also aimed at an expansion of the Medicare managed-care market. The same was true for Humana’s acquisition of MD Care and Arcadian Management Services, both Medicare Advantage providers.
Aetna, for its part, has also expressed interest in acquisitions that would boost its Medicare population. Aetna’s cash and cash equivalents, which stood at close to $2 billion at the end of the third quarter, give it the necessary resources for one or several deals that could help it to catch up with its competitors. The other big insurers are also flush with cash. UnitedHealth ended the third quarter with cash and cash equivalents of $13.7 billion, while Humana had $4 billion and WellPoint had $2.5 billion at their disposal.
The U.S. health insurance industry is very fragmented, and appears ripe for consolidation. Health system reform should also encourage mergers and acquisitions in the industry. The big companies are expected to buy up smaller providers in order to increase their share in a particular market or geographic region, and to benefit from economies of scale and efficiency gains.
As managed care penetration of Medicare keeps increasing, the five largest insurers could target the following companies in order to increase their Medicare Advantage population:
Amerigroup (AGP): Amerigroup offers its healthcare services through contracts with primary care physicians, specialists, hospitals, and ancillary providers. It provides products to over 1.9 million members in 11 states. It is in the process of acquiring Health Plus, a program with 320,000 members, and has the potential for being an acquisition target itself. AGP has a market cap of $2.51 billion and ttm EBITDA of $416.63 million. AGP’s price-earnings ratio is 11.50, compared to 12.46 for health care plans overall.
Coventry Health Care (CVH): Coventry Health Care has over 5 million members in 50 states and a range of products and services which includes group and individual health insurance, Medicare and Medicaid programs, and coverage for specialty services such as workers’ compensation. CVH has 1.37 million Medicare customers, and has increased its Medicare Advantage market share over the last few years. It has a market cap of $4.21 billion, ttm EBITDA of $928.27 million, and a P/E ratio of 7.37.
Health Net (HNT): Health Net provides health benefits through its health maintenance organizations, insured preferred provider organizations, and point of service plans to approximately 6 million individuals across the U.S. It also offers behavioral health, substance abuse, and employee assistance programs, as well as managed health care products for prescription drugs. As of the end of 2010, approximately 660,000 Medicare beneficiaries were enrolled in its plans. HNT has lost MA market share over the last four years, in part due to the Centers for Medicare & Medicaid Services (CMS) sanctions on marketing. It has a market cap of $2.29 billion and ttm EBITDA of $172.27 million, and a comparatively high PE of 28.85.
Universal American (UAM): Universal American is a pure-play Medicare name whose targest group is the senior population in the U.S. The number of members in its Medicare Advantage plans has declined as it was also subject to the CMS sanctions imposed in November 2010 for violations of Medicare’s rules and regulations, resulting in membership of approximately 164,000 as of the end of the third quarter. UAM is relatively small compared to the other potential takeover targets with a market cap of $966.24 million. Its ttm EBITDA is $227.66 million. Its P/E ratio is 12.48, close to the industry average.
WellCare Health Plans (WCG): Like UAM, WellCare Health Plans focuses its managed care services on government-sponsored healthcare programs in the U.S. It offers a variety of health plans for families, children, and the aged, blind and disabled, as well as prescription drug plans. As of the end of 2010, it had approximately 1,340,000 Medicaid members, 116,000 MA members, and 768,000 prescription drug plans (PDP) members. WCG has a market cap of $2.26 billion and ttm EBITDA of $368.33 million. Its trailing P/E is 11.87.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.