NEW YORK--(BUSINESS WIRE)--A combination of any of the five largest US health insurers could accelerate further merger and acquisition activity in the managed care sector, says Fitch Ratings. Just one mega M&A deal could lead to similar responses by competing firms seeking to shore up competitive disadvantages in scale and product lines.
Fitch sees the M&A potential in the health insurance sector as a direct response to anticipated market conditions in a post-Affordable Care Act (ACA) world. Rumors of health insurance M&A activity among the five largest publicly-traded health insurers in the US have accelerated in recent weeks.
Fitch's view since the ACA became law has been that the US government's public policy goal of promoting affordable health insurance, manifested in the ACA, would add to health insurers' membership volumes but reduce member margins. This margin pressure would be exacerbated by the US government's challenging fiscal condition, employers' on-going desire to reduce health care costs and a heightened need to invest heavily in technology.
As a result, Fitch believes that size and scale - and the expense efficiency they bring - are quite important to health insurers' competitive positions and financial results. In addition, the importance of product line (i.e. individual, group, Medicare, Medicaid) diversification will increase in response to the government's increasing role in the market, the aging US population and employers' desires to reduce health care costs.
Notwithstanding the potential positives of an M&A in the sector, the financial leverage metrics are at the high end of rating category guidelines for publicly traded health insurers in Fitch's rating universe. M&A activity would likely pressure these metrics. To the extent that M&A's leverage effects outweigh scale and product diversification benefits, downward rating actions would be possible.
Expectations of higher interest rates are likely adding to M&A pressures in the health insurance industry as potential acquirers strive to take advantage of historically low borrowing costs. Offsetting this pressure somewhat is the strong share price increases among most publicly traded health insurers, which has dramatically increased the cost of prospective M&A.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.