Paul Kacik is Managing Director, McGladrey Capital Markets, Costa Mesa, Calif.
What do you see as the current state of the healthcare payer merger and acquisition sector?
I think it is currently business as usual with respect to healthcare payer M&A activity. Most of the larger payers continue to use M&A as a way of adding new service lines to their business or adding/rationalizing smaller health plans to and from their business mix, as the case may be. While health plans have been consolidating for a number of years in an effort to achieve greater economies of scale, I haven't yet seen the larger healthcare payers react to healthcare reform via any meaningful M&A activity. Payers, however, are extremely concerned over how healthcare reform will ultimately affect their business, and we will undoubtedly see a wave of M&A transactions in this space over the next couple years as a direct reaction to the changes brought on by healthcare reform.
What challenges will health insurers encounter with the new reform law and M&A activity?
The short-term changes that the healthcare reform bill requires will have a negative effect on health insurer profits. Health insurance companies are no longer able to sell policies with lifetime caps, deny coverage for children due to a pre-existing condition or drop coverage of adults who become sick. In addition, insurers with significant exposure to Medicare Advantage plans will be negatively impacted as the government cuts payments towards these plans by approximately $200 billion. Changes to these practices, which have historically driven profitability for many health insurers, will force these companies to find new ways to drive growth. Many smaller health plans will be forced to merge with their larger counterparts as a means to survival, and the larger companies will need to use M&A as a tool for building scale and margin enhancement.
Will health reform law lead to reduced industry capacity as the health insurance industry becomes more highly regulated and product offerings more commoditized?
For the most part, Wall Street generally believes this to be the case. And for this reason, I believe we should expect to see significant M&A activity coming out of the healthcare payer sector in the coming years, as these companies attempt to adapt to healthcare reform. However, in my opinion, in the long run, I don't believe we will see a commoditized health insurance industry. As in many other industries, I believe the health insurance industry will find new products to offer and new ways to service its customers, in turn driving growth. Additionally, with healthcare reform, insurance companies are expected to gain around 32 million new customers, ultimately generating significant cash flow for the industry. While health reform law will certainly dictate what insurance companies can and cannot do, I believe that we are likely to see sustained profitability from larger payers in spite of the restrictions imposed upon them through healthcare reform.
How do you expect this to affect providers and consumers?
In the short run, I believe the negative pressure on insurance company profitability will directly affect both providers and consumers. Health insurance companies will likely seek to "share the pain" in the form of lower reimbursement for providers and higher premiums to consumers. Ultimately, however, I believe that as healthcare payers adapt to the new post-reform environment, and develop new and profitable product and service offerings, both providers and consumers alike will benefit in the form of greater reimbursement for specialized areas of care, lower policy premiums, and a broader choice of plans tailored for individual need.