Health Insurance Consolidation Begins With A Bang

Just last Thursday, I wrote about the forthcoming consolidation in U.S. health insurance. My thesis was that only large, centralized, politically powerful insurers could continue to thrive.

With perfect timing, Humana, Inc., announced on Friday that it was putting itself on the block, and the shares rallied about twenty percent. They continue to climb today.

“Because of the Affordable Care Act, the whole insurance market is shifting towards a lower margin model,” said Chris Rigg, an analyst with Susquehanna Financial Group. “Generally speaking, the bigger you are, the better.” (Michael J. de la Merced & Julie Creswell, New York Times DealBook, May 29, 2015)

Kaiser Health News summarizes the coverage in the financial media. Leerink Swann’s Ana Gupte agrees with other sell-side analysts that consolidation is overdue:

A first domino in overdue managed care M+A seems set to fall. Intraday, managed care company Humana has been reported in national press to have received indications of takeover interest and is working with its financial advisor. This is line with our recently published view that Humana’s Medicare Advantage franchise will spur near-term acquisition interest in Humana from industry consolidators. (Ben Levisohn, Barron’s Stocks to Watch, May 29, 2015)

Humana is a Medicare Advantage business with a special interest in the so-called “dual eligible”, those who are eligible for both Medicare and Medicaid. When it comes to Obamacare, Humana is not interested in participating broadly. According to a January 2014 analysis:

While most insurers offer plans across entire rating areas or entire states an examination of Humana’s plan offerings show that they’ve focused almost exclusively on the higher population areas within states on the Federal Exchange. In some cases offering plans in only one or two counties per state. In the state of Louisiana for instance the company is only offering plans in Jefferson County, the highest population density county in the state. (Jonathan Wu, ValuePenguin, January 30, 014).

My thesis is that this approach will soon no longer be tenable if Obamacare survives. Health plans will have to profit heavily from Medicare Advantage and Medicaid managed care, and be forced to cross-subsidize Obamacare plans, which will generally lose money.

Here’s more evidence of how carriers are faring in Obamacare’s second year, from Montana:

Blue Cross’ parent company, Health Care Service Corp., reported losses of $282 million for 2014 — almost $1 billion less than its $684 million net gain for the previous year.

PacificSource, headquartered in Springfield, Oregon, reported a fairly moderate loss of about $17 million last year. It serves about 275,000 customers on commercial insurance, Medicare plans and managed Medicaid plans.

In Montana, PacificSource has about 30,000 customers, not all of whom bought on the marketplace.

The Montana Health Co-op, a new nonprofit insurer, lost about $4 million last year on $30 million worth of business, Dworak said. The co-op insures about 25,000 people in Montana and another 19,000 in Idaho.

Figures for Assurant, the fourth company selling on the marketplace, weren’t available. (Mike Dennison, Helena Independent Record, May 29, 2015)

The only glitch in my thesis is Oscar, a venture financed insurer that only operates on Obamacare exchanges in New York and New Jersey. If anyone has insight how Oscar pulls it off, please comment below. Personally, I struggle to see how a standalone Obamacare insurer can survive, even with razor-sharp underwriting.


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