Think outside the box for healthcare M&A

Tools

Mergers and acquisitions are on the rise throughout the health insurance industry since the reform law was passed. And given that President Obama's recent re-election essentially cements the reform law into existence, there's a good chance M&A activity will ramp up as payers try to position themselves for the post-reform insurance market.

But the key to making wise M&A moves? Thinking outside the box to consider non-conventional targets, Jill Dailey, senior executive of health strategy for consultant firm Accenture, told FierceHealthPayer.

Indeed, a recent Accenture report found that mergers and acquisitions that "build capabilities outside of a payer's core operations" gives them access to "diversified and non-regulated revenue streams." What company doesn't want to gain the right of entry to that cash flow?

That's why payers are increasingly looking for "diversified sources of profitable growth and ways to preserve their current bottom line performance," the report said. "These plays open new streams of revenue with relatively less regulation than the core payer business, and may offer new opportunities to engage with patients and more effectively manage medical costs."

But the type of acquisitions payers are interested in has shifted since 2010, when the reform law was passed. From 2004 to 2009, 83 percent of the 70 merger and acquisition transactions focused on expanding payers' business and membership. From 2010 onward, payers began focusing on creating diversifying capabilities, as 61 percent of the 23 M&A transactions targeted new capabilities and only 39 percent were driven by membership growth, Accenture found.

In fact, Accenture predicts over the next four years, payers will spend $10 billion to $12 billion in acquisitions of non-conventional targets that, for example, better engage consumers to manage their own health. 

An insurer could, say, buy a company that provides a consumer engagement tool with robust and predictive analytics, multi-channel communication capabilities and elements that drive better health and wellness, Dailey said. The payer could then embed that tool in its benefits package offered to employers to help them better manage medical costs. 

Given the health insurance industry's less-than-stellar relationship with consumers, Dailey recommended payers improve their understanding of consumer behavior to make more appropriate and tailored M&A decisions. Studying the financial services industry, for example, is key. "Banks and non-health insurance companies consistently scored higher than health insurance companies on customer service in a 2011 cross-industry consumer survey conducted by Accenture," Dailey said. By studying the financial sector, then, health payers can gain insight on how those companies have effectively turned around their consumer service and engagement programs.

Tempting as it is to label each merger and acquisition as a success or failure, Dailey said "determining whether an M&A move is smart is dependent on the individual company's strategy." However, some themes have emerged in the post-reform M&A arena:

First, many health plans are looking toward vertical integration, including how to be involved in the delivery of care, by acquiring hospitals, clinics or physician practices.

Additionally, payers are looking to beef up their analytics capabilities by buying companies that offer predictive modeling programs that "identify likely care needs for individual members, alert providers to needed preventive care and enable timely and actionable communications with individual members," Dailey explained.

And although expanding membership has waned as a focus of recent M&A activity, she said some payers still are "making acquisitions to better prepare for serving the approximately nine million dual-eligible beneficiaries that cost $260 billion in annual Medicare/Medicaid expenditures." To that end, they're looking to merge with or acquire businesses that can enhance specific capabilities to serve the new membership population, such as long-term care products.

What do these new trends actually mean for individual payers? Dailey recommended insurers "acquire a company that complements rather than expands their core insurance business." She pointed to Humana's 2010 acquisition of Concentra, "which ran businesses outside of Humana's core payer operations," as an example.

As the Accenture folks said in their report, "Acquisitions beyond the payer channel can increasingly be viewed as a critical component of sustainable growth." In other words, merge and acquire to go forth and prosper. - Dina (@HealthPayer)