Analysts Expect Plenty of Insurer M&A in 2021, but Few Big Deals in the Pipeline

Industry analysts say they expect the environment for mergers and acquisitions in the health insurance sector to be “favorable” this year, and thus they anticipate “robust M&A activity” among firms that are eager to diversify their assets and modernize their technology.

However, large, transformational deals, such as Cigna Corp.’s purchase of Express Scripts or CVS Health Corp.’s acquisition of Aetna, likely won’t be the norm in 2021, states a Healthcare Quarterly report published by Moody’s Investors Service in April.

“We’ve already seen several deals this year, and I think those are a good indicator of the kind of deals that you’ll see [going forward],” Dean Ungar, vice president and senior credit officer at Moody’s, tells AIS Health. The Moody’s report highlights UnitedHealth Group’s proposed purchase of analytics firm Change Healthcare, Centene Corp.’s move to buy Magellan Healthcare Inc., Anthem, Inc.’s bid to acquire Puerto Rico Medicare Advantage carrier MMM Holdings Inc., and Cigna’s deal to buy telehealth platform MDLive as examples of transactions in which insurers are aiming to augment their insurance- and non-insurance-related offerings.

“The transformative deals of the past, I’m not sure there’s enough space left in the industry to pursue further large-scale consolidation [like] Cigna/ESI, CVS/Aetna,” adds Stefan Kahandaliyanage, assistant vice president and analyst at Moody’s.

“Those kinds of large deals, the industry has already been through that wave, and I think it is now really just focusing in on how to make those deals perform the best that they can. And they’re doing that by buying businesses that will help bend the [health care cost] trend.”

As the Moody’s report states: “The main driver for most of these deals is the desire to move beyond traditional health insurance to contain overall industry costs, which have been increasing above inflation for years.”

Centene’s deal with Magellan, for example, shows the insurer is aware that “addressing behavioral issues is crucial to maintaining overall health, which will help keep medical costs down,” per the report. UnitedHealth’s, Cigna’s and Centene’s latest deals “also bring additional third-party and unregulated revenue, which further diversifies earnings as well as risk.” And while Anthem’s acquisition of MMM “is a more traditional transaction, it is helping the company expand in the industry’s highest growth insurance segment.”

Health care equities analysts, speaking during an April 9 panel discussion convened by the Brookings Institution called “Wall Street Comes to Washington,” also cited the booming Medicare market as an area primed for more M&A.

“Medicare Advantage is considered, at least by the investment community, the most attractive subsegment of the market right now,” said George Hill, managing director at Deutsche Bank. The MA market, he noted, “continues to have high single digit growth” in terms of beneficiaries, as more people switch from traditional Medicare and baby boomers age into the program.

An April 26 report from A.M. Best, meanwhile, takes a wider view by observing that “health insurers have been heavily involved in M&A over the last decade. Not only have they acquired other health insurers, but there has been a notable trend of increasing vertical integration.”

And that trend is only going to intensify in the near future, the credit rating firm predicts, noting that health insurers “reported record earnings and accumulated a significant amount of cash in 2020.”

Insurers Rely Less on Premium Revenue

Already, some of the largest publicly traded health insurers’ diversification moves have shrunk the percentage of their gross revenues that comes from health insurance premiums, A.M. Best points out. For example, health care premiums have hovered around two-thirds of gross revenue at UnitedHealth for five years, while premiums accounted for less than 30% of Cigna’s gross revenue after it purchased Express Scripts — although that doesn’t factor in revenue from the firm’s large, self- insured accounts business.

Regarding Cigna’s most recent deal — with MDLive — Moody’s analysts aren’t convinced that the move will trigger a host of other transactions in which health insurers buy telehealth platforms.

“Teladoc and MDLive are urgent care — they’re the people you call if your baby’s sick in the middle of the night,” Ungar points out. Whereas, “what [insurers are] trying to do is enable telehealth with your own doctor, and there’s lot of money being invested in that. The next wave is going to be bringing telehealth to your own network.”

“One of the considerations in these sorts of deals is, what is the cost of buying versus building, renting or partnering?” Kahandaliyanage adds. “When you think about how to bend this [cost] trend…is acquiring a [telehealth] company the right way to go, or is it partnering and doing the same thing for less upfront cost?”

Highmark, for example, went the partnership route when it reached an agreement in which Verily, the life sciences arm of Google parent company Alphabet Inc., will provide the Pittsburgh-based payer/provider with data analytics and artificial intelligence capabilities, the Moody’s report points out.

“What they’re going to do there is try to create an ecosystem within Highmark,” which both is an insurer and has a large hospital network, wagering that “if you can link those two together in a technological way, then you have a shot at really bending this [cost] trend down,” Kahandaliyanage tells AIS Health.

The Moody’s analysts also say they don’t expect many copycat deals in the vein of UnitedHealth/Change Healthcare, chiefly because many companies just aren’t set up to integrate such an acquisition.

“Everyone wants to be United, but not everybody is in the position,” Kahandaliyanage says, pointing out that Change will fit into UnitedHealth’s existing OptumInsight business that sells analytics services to payers and providers. “Not everybody has that — Cigna arguably has that now; Anthem maybe would like to get there. So I think there’s a lot of steps involved; you just don’t become United overnight, although I think Cigna made a good stab at it by buying Express Scripts.”

The Cigna/Express Scripts deal was also part of a trend — starting with UnitedHealth purchasing Catamaran Corp. — that has fundamentally transformed the PBM business, according to the A.M. Best report. “About 90% of the market is now serviced by vertically integrated enterprises, a vastly different landscape than prior to the Cigna and Aetna transactions in late 2018, when roughly 50% of the market was not integrated,” the report states.

Equities analysts speaking during the “Wall Street Comes to Washington” event, however, expressed skepticism that insurer/PBM integration has reached its full potential.

“We have companies that report a PBM segment and report a managed care segment,” said Ricky Goldwasser, managing director at Morgan Stanley. “And if we think about reporting lines, internally, within institutions…that drives behavior, that drives culture, that drives alignment. If you really want an integrated offering, go ahead, merge the two. Make sure that the two have true incentives to work together, rather than compete as business segments for resources, etc.”

Matthew Borsch, managing director at BMO Capital Markets, added that the most sophisticated PBM customers — self-insured, multistate employers — haven’t shown much enthusiasm for bundling medical and pharmacy benefits.

“There’s still the carveout model, where they’ll contract with three or four or five different health plans, and then typically have a single contract, separately, with one PBM,” he said. “It’s still the dominant model, and they, to my knowledge, they really haven’t moved away from that yet.”

Learn more about MMIT’s Landscape solution to gain a single source of truth for your payer strategies.

Leslie Small

Leslie has been reporting and editing in various journalism roles for nearly a decade. Most recently, she was the senior editor of FierceHealthPayer, an e-newsletter covering the health insurance industry. A graduate of Penn State University, she previously served in editing roles at newspapers in Pennsylvania, Virginia and Colorado.

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