OLDWICK, N.J.--(BUSINESS WIRE)--In the wake of the Patient Protection and Affordable Care Act (ACA), there has been a flurry of announcements of planned consolidation talks and agreements among several of the industry’s largest health insurance companies in recent months. A.M. Best attributes this increased interest to the combination of the need for diversification given the lack of organic growth in the commercial/employer sector, the recent expansion in government-sponsored programs, such as Medicare and Medicaid, and the opportunities these provide for expansion of revenue and earnings.
A new Best Special Report, titled, “Top U.S. Health Insurers Looking to Diversify Operations & Revenue Streams, Increase Scale,” states increased scale would help insurers achieve a lower administrative expense ratio in the medium to long term due to the ability to spread costs over a larger membership base. Greater scale also creates the potential for increased bargaining power with providers due to a larger number of members served in a given market.
With the advent of Accountable Care Organizations, Coordinated Care Organizations and new payment models, carriers and providers are looking to create innovative and interesting partnerships. This has also led to a race to the top, where some larger insurers have a hand in almost every aspect of the overall health care delivery chain partially driven by strategic merger and acquisition (M&A) deals. The total number of announced deals involving the Medical-HMO segment has ranged from a high of 65 deals in 2007 to a low of 25 announcements in 2009. Through July 2015, there have been 30 announced deals. The total value of USD 152.1 billion related to the 2015 announced deals has shattered the previous high of USD 18.9 billion reported in 2012.
According to a recent A.M. Best survey, 33.3% of health industry respondents stated the main driver of M&A is to improve overall business diversification. An additional 28.6% stated that M&A is a good strategic use of excess capital while another 14.3% are driven to meet targeted growth or market share objectives. Given the fact that the health insurance industry has increased its capital and surplus position 28.8% since 2010, and the average NAIC risk-based capital company action level ratio on an individual entity basis has exceeded 400% in each of the last five years, it is not surprising that the survey respondents felt that M&A activity is a good, strategic use of excess surplus to fulfill organization goals.
The last decade has brought much M&A activity to the health insurer market, with the most recent talks of merging titans reaching somewhat of a culmination point. Insurers view the increased scale as a primary way to boost and diversify earnings, revenue and product offerings. Health insurers have been critical of hospital mergers in recent years. They argue that getting bigger will enable them to leverage lower prices from providers, drugmakers and other industry players, thus saving money for employers and consumers. Conversely, hospitals have been critical of potential insurance deals, arguing that insurance oligopolies keep provider payments low while boosting prices for customers.
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