Healthcare M&A Rethink: Why Are Healthcare Payers On the Hunt For Healthcare Providers?

US healthcare reform changes are driving payers to expand their M&A focus.

Dramatic changes—driven in part by US healthcare reform—are causing payers to expand their M&A focus beyond health insurance, a strategy that promotes sustainable growth and boosts enterprise value. In the past, healthcare payers looking for inorganic growth acquired companies that allowed them to enter new geographies, expand membership or enhance core operations.

Accenture’s analysis of 70 deals from 2004 to 2009 shows that 83 percent pursued these traditional strategies while only 17 percent sought to acquire new capabilities beyond the core business. Compare that to payer mergers and acquisitions in 2010 and 2011, when over 60 percent of deals involved the acquisition of new, non-core capabilities.

Transactions that build capabilities outside of a payer’s normal operations can enable companies to access diversified and non-regulated revenue streams that stand apart from the traditional payer industry. This article looks at how payers are expanding their M&A activity in the hunt for this new revenue.

As part of an effort to improve US healthcare delivery, the passage of healthcare reform includes the assessment of a surtax on payer earnings. For the four largest national payers alone, this surtax is estimated at more than $2.5 billion. As a result, industry leaders have a large gap to fill.

Furthermore, with national healthcare reform fast approaching, payers are increasingly looking outside the industry for new, diversified sources of profitable growth and ways to preserve their current bottom line performance. These plays open a new channel with relatively less regulation than the core payer business, and managed care provides a way for payers to control costs more effectively.

Accenture predicts that $10 billion to $12 billion in payer acquisitions will likely migrate toward non-conventional targets over the next four years. Industry players are already pursuing a variety of sources of diversified revenue and ways to safeguard current bottom-line results through acquisitions in previously separate industries.

The payer Highmark, for example, is pursuing healthcare delivery. The company announced in 2012 that it would affiliate with Premier Medical Associates, the largest multi-specialty doctor group in western Pennsylvania. Premier has gained a reputation for providing cost-effective, high-quality care. Highmark is also acquiring the five-hospital West Penn Allegheny Health System. Other payers have also acquired companies that complement rather than expand their core insurance business. For instance, a major player recently purchased a variety of businesses outside of its core payer operations, which range from a national chain of urgent care centers to in-home care providers.

Acquisitions beyond the payer channel can increasingly be viewed as a critical component of sustainable growth. However, this change has implications that go far beyond acquisition target identification and screening. Leading payers must act to redefine their integration practices in ways that help them to generate high levels of enterprise value.

In addition to purchasing providers and care channels, we expect payers to continue to pursue new capability acquisitions among companies in the health, wellness, and “disease coaching” spaces. We examine the challenges these M&A strategies pose to payers in the next part of this series.