The US health plan market has seen a flurry of merger and acquisition activity, with development of market power and operational scale through consolidation of membership. Provider-sponsored health plans (PSHPs), while constituting a substantial share of the number of health plans, account for only a small share of enrolled members. We anticipate that PSHPs will need to consolidate to gain market and operational scale for future success.
Valuation is often a first step in a transaction, to ensure that a fair price is paid. But the valuation exercise can also lay the foundation for an effective acquisition due diligence process and provide the early stages of a roadmap for postmerger integration to improve performance.
This four-part series will provide insight on the current state of the US health plan market, address valuation and line-of-business nuances that can substantially affect value or performance improvement, and demonstrate how valuation can advance the due diligence and merger integration processes. We encourage all health plans contemplating a transaction to maximize the benefits of the valuation by understanding the insight it provides to advance the due diligence and merger integration processes.
The Health Plan Market
As of 2018, the US health plan market consisted of approximately 493 health plans. Large plans (defined as having more than 500,000 enrolled lives) accounted for 17% of plans but 89% of enrollment. This segment is dominated by the brand name national insurers, but it also includes large provider-sponsored health plans (PSHPs) such as Kaiser Permanente.
Plan | Enrollment Range | Total Health Plans | % of Total Plans | Provider Sponsored Health Plans | % of Plans by Size | Blue Cross Plans | % of Plans by Size | Enrolled Lives | % of |
All Plans | 493 | 100% | 229 | 44 | 328,395,088 | 100% | |||
Large | >500,000 | 84 | 17% | 13 | 15% | 31 | 37% | 291,995,777 | 89% |
Medium | 50,000–499,000 | 169 | 34% | 73 | 43% | 13 | 8% | 33,956,970 | 10% |
Small | <50,000 | 240 | 49% | 143 | 60% | 0 | 0% | 2,442,341 | 1% |
The last several years have seen a flurry of large health plan transactions, some consummated and others abandoned.
These large plan transactions have garnered the banner headlines due to their impact on investors. Transactions have included WellCare Health Plans’ acquisition of Meridian Health Plan of Michigan, Meridian Health Plan of Illinois, and MeridianRx; Centene’s acquisitions of Health Net, Fidelis Care, and WellCare; and the abandoned Cigna-Anthem and Aetna-Humana mergers (with Aetna subsequently changing course and instead engaging in a vertical integration with CVS Health). Large health plan transaction activity will likely continue as plans look to gain health insurance market share and diversify product lines, measured in terms of insurance line of business (LOB) expansion and addition of healthcare delivery and distribution resources. Recent examples of health insurance expansion through acquisition include Anthem’s acquisition of Beacon Health Options (behavioral health risk contracts and program management) and Centene’s acquisition of WellCare (Medicare Advantage) that closed January 23, 2020. Expansion through healthcare delivery acquisition has included Optum’s acquisition of DaVita Medical Group (physician practices), among others; the Aetna-CVS merger; and Cigna’s acquisition of Express Scripts.
PSHPs dominate the small plan market, which has hundreds of plans that are extremely small in scale (see table below).
Plans | Enrolled Lives | |||
Size | Number | % | Number | % |
<500 Lives | 100 | 41.7% | 20,298 | 0.8% |
500–5,000 Lives | 52 | 21.7% | 84,647 | 3.5% |
5,000–15,000 Lives | 22 | 9.2% | 217,914 | 8.9% |
Total: <15,000 Lives | 174 | 72.5% | 322,859 | 13.2% |
15,000 <50,000 Lives | 66 | 27.5% | 2,119,482 | 86.8% |
Total: <50,000 Lives | 240 | 100.0% | 2,442,341 | 100.0% |
Source: Edifecs, “Insights into the Small & Medium Health Insurance Market,” 2018.
To maintain competitiveness and financial viability, these small plans must achieve enrollment scale and accumulate capital to fund the expanding requirement of more sophisticated data management and analytics programs to manage risk. Many of these plans are owned by tax-exempt providers that may not be as interested in outright acquisitions as in consolidating to achieve scale and combine capital to fund infrastructure development. Examples include the formation of Quartz Health Solutions (the combination of UW Health, Gundersen Health System, and UnityPoint Health) and the acquisition by Optima Health (a subsidiary of Sentara Health) of an 80% stake in Virginia Premier Health Plan (previously a subsidiary of VCU Health System). Looking to achieve economies of scale, Optima Health and Virginia Premier will consolidate management teams and operate two health plans through a single set of operating systems.
Small- and medium-insurer LOBs have a greater prevalence of government programs, including Medicare Advantage, Medicaid, and small dual-eligible (duals) plans. Originally, many PSHPs entered the Medicaid market to ensure funding for services provided to low-income patients. More recently, PSHPs have entered the Medicare Advantage and dual LOBs under the belief that they could excel at integrated care and because of the improved Medicare portion of reimbursement due to changes in the risk-adjustment program. The table below summarizes the LOB focus in the small and medium (SM) health plan market.
Plans | Enrolled Lives | |||
LOBs | Number | % | Number | % |
Commercial Risk | 137 | 33% | 8,546,309 | 23% |
ASO | 73 | 18% | 4,820,468 | 13% |
Government: Total | 356 | 23,032,534 | ||
Medicare Advantage | 144 | 35% | 2,490,570 | 7% |
Medicaid: Total | 144 | 35% | 19,072,426 | 52% |
Managed Medicaid | 108 | 26% | 13,122,632 | 36% |
Medicaid FFS | 36 | 9% | 5,949,794 | 16% |
Duals | 177 | 43% | 735,392 | 2% |
SCHIP | 53 | 13% | 734,146 | 2% |
Total SM Market | 409 | 36,399,311 | ||
Overall, the SM market experienced a slight decline in the number of enrolled lives between 2013 and 2018, with a larger loss in the medium segment and lesser growth in the small segment. One of the reasons for the apparent stagnant enrollment in the SM market is the amount of acquisition activity.
The SM market has also been very dynamic, experiencing frequent additions and departures between 2013 and 2018. The table below illustrates the dynamic nature of the SM market.
Total SM Health Plans: 2013 | 402 |
Additions: 2013–2018 Total | 111 |
New Entrants: Total | 105 |
Small: New | 92 |
Medium: New | 13 |
Enrollment Decline: Former Large | 6 |
Departures: 2013–2018 Total | 104 |
Enrollment Increase to Large | 13 |
Transactions: Total (33 small) | 50 |
Acquisitions | 16 |
Consolidations | 34 |
Ceased Operations | 41 |
Total SM Health Plans: 2018 | 409 |
Net Change | 7 |
The dynamics have been driven by unique events in LOBs. For example, plans found lower margins in Medicaid managed care, and more SM plans left the Medicaid managed LOB (17) than entered it (3) between 2013 and 2018. Many plans that were organized to offer ACA-qualified health plans on and off the exchanges experienced business failure, including most COOPs.
Overall, greater stability is returning to the ACA individual market. More insurers have entered the market or expanded the number of states in which they offer plans in 2019 and 2020. CMS has reported a significant increase in the number of new plans in 2019 and 2020, likely related to the stability and profitability of the Medicare Advantage market and providers believing that they are uniquely positioned to manage medical risk and generate data to support risk adjustment and the Star rating. However, the slow pace of enrollment growth, coupled with an increasingly crowded and competitive market, as well as greater demand for capital to fund infrastructure to manage risk and optimize Star and risk-adjustment revenue, will likely contribute to continuing dynamic markets. Many health plans are likely to entertain transactions (e.g., sales, consolidations) to achieve strategic objectives and will benefit from valuation services.
Why Obtain a Valuation
A tax-exempt health plan in a transaction with a for-profit entity should conduct the transaction at arm’s length and properly appraise the assets in order to avoid inurement, which could benefit an individual and put the nonprofit status at risk. The nonprofit must ensure it has not provided an impermissible private benefit by acquiring assets at an unreasonable price and should avoid excess benefit transactions. An excess benefit transaction occurs when an entity is sold for less than it is worth, as the economic benefit provided exceeds the value of the sale.
Valuations might not always be required when two nonprofits are involved or if a for-profit entity is acquiring the nonprofit. However, valuation experts are still hired to ensure a fair price is paid. Entities turn to an appraiser for its expertise in the insurance market to help negotiate a fair deal. Insurance transactions involve numerous financial considerations that must be taken into account. Having a third party provide an opinion will help identify some of the financial risks.
Valuation Methodology
There are three valuation methodologies: (1) the income approach, which determines the health plan’s current value of the discounted cash flow based on a forecast of future performance; (2) the market approach, which determines value by comparable sales; and (3) the cost approach, which assesses the value of the underlying assets of the health plan being acquired. The cost approach is not often utilized because health plans own minimal assets. The income approach is heavily relied upon for profitable businesses; however, not all health plans are profitable yet still receive a purchase price based on a price per member multiple. The income approach will often inform the multiple used in the market approach, as the income approach will include details regarding the different LOBs and how profitable they are. ECG has a proprietary transaction database with the profitability by LOB broken down for the target entities to better assist with determining an appropriate multiple. The second article in this series will further describe the different valuation methodologies.
Published March 24, 2021