Gauging the Managed Care M&A sector is a nuanced affair. On one hand, the M&A market, especially in the last few years, has been relatively subdued, at least in terms of the raw numbers. In 2022, investors announced 44 Managed Care M&A transactions, a minor slowdown compared with the 48 deals announced in 2021. Like other sectors, the market was hit with some headwinds.
“Health insurance providers and HMOs have to deal with industry challenges like other providers,” said Bruce D. Platt, Partner at Akerman, a full-service national law firm. With a background in healthcare and medical technology, Mr. Platt helps insurers, providers and related companies navigate federal and state regulations and administrative law.
“As inflation drives up healthcare expenses, that obviously also affects health insurance costs,” said Platt.
The health insurance market is also under strict scrutiny from state and federal regulators. Each state has a unique process, so any company that wants to expand needs to grapple with those rules and requirements.
“Whether you want to grow through M&A or just by expanding into a new state, it can be a long and difficult process,” said Platt. “For example, in Florida, you have to establish a corporation in the state in order to do business as an HMO. It might seem easier to acquire a company already established in the state, but then you have to deal with that company’s existing liabilities. You have to deal with the bad and good.”
Despite some tough market conditions, there were some notable deals in 2022. Centene Corporation sold Magellan Specialty Health, a specialty benefit management organization, to Evolent Health, Inc. Centene expects to receive approximately $600 million in proceeds at closing, with at least $400 million paid in cash and the remainder paid in Evolent common stock. Centene will receive up to $150 million in cash and Evolent common stock in 2024 if certain performance metrics are achieved.
Molina Healthcare, Inc., one of the largest health insurance companies in the United States, expanded its presence in Wisconsin with the acquisition of My Choice Wisconsin, a Medicaid-managed care organization. It has a 22-year history of serving managed long-term services and supports (MLTSS) populations. As of May 2022, My Choice Wisconsin served over 44,000 MLTSS and core Medicaid members throughout Wisconsin, delivering approximately $1 billion in 12-month revenue. The deal was valued at $150 million.
However, most of the Managed Care M&A activity shows there is an interest in different healthcare verticals. Companies like Humana and Optum are pushing into new markets, building a whole continuum of care network. Instead of targeting other health insurance providers, they’re acquiring healthcare companies across the spectrum: home health, primary and value-based care, digital health and so on.
“There is more and more integration between payer and provider. Every corporation will look out to see what opportunities there are to grow,” said Platt.
In February 2023, Optum closed on its acquisition of LHC Group, which was valued at $6 billion, including debt. LHC’s home health network reaches 37 states and it has 30,000 employees. LHC Group had a full-year 2021 revenue of $2.220 billion. Last year, Optum also purchased Healthcare Associates of Texas, a physician practice management company, for a reported $300 million, and EMIS Group, a provider of healthcare software, for $1.5 billion. Humana and Cigna have pursued similar strategies, purchasing large providers to have a presence in the entire healthcare vertical.
The surge of Medicare Advantage (MA) plans is one of the major tailwinds driving these deals.
MA has one of the fastest-growing enrollment rates for Medicare. It offers key advantages over traditional Medicare plans. Since most MA plans require members to use services and doctors in the membership network, payers keep the reimbursement in-house, and it could help cut down on costs for patients. According to an analysis by the Henry J. Kaiser Family Foundation, “nearly four in ten (39%) of all Medicare beneficiaries – 24.1 million people out of 62 million Medicare beneficiaries overall – are enrolled in Medicare Advantage plans.” The article cited that the “Congressional Budget Office projects that the share of all Medicare beneficiaries enrolled in Medicare Advantage plans will rise to about 51 percent by 2030.”
MA is already playing a large role in companies’ earnings. In 2022, major players like Humana, Centene Corporation and Cigna Corp. all experienced a double-digit increase in year-over-year revenue, thanks to the growth in value-based care offerings and MA memberships.
“We also reaffirmed our expectations for a full year individual Medicare Advantage membership growth of at least 625,000 members, a 13.7% increase year-over-year,” said Bruce Broussard, president and CEO of Humana in the company’s Q4:22 earnings call.
Centene had similar results.
“In our Medicare Advantage business, Centene generated outsized growth in 2022, ending the year with 21% more members compared to year-end 2021,” said Sarah London, CEO of Centene in the recent earnings call.
The line between payer and provider is blurring, and the shift is shaking up the healthcare industry. The surge of MA enrollment and membership is pushing further consolidation in an industry already experiencing a historic volume of M&A activity, but there are major headwinds facing the healthcare market this year. We’ll see if these corporations and investors can keep up the pace.
