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Historically Blues have shied away from Medicaid. Two thirds of plans do not serve any Medicaid and those that do often have disproportionately small shares. No real surprise: Medicaid specialist plans can fluidly move in and out of markets depending on the rates and redeploy their capabilities wherever are the best returns. Blues on the other hand, are prime “hold-up” targets because they are largely stuck in their assigned states. They can only respond to an offer of low rates with a threat of dismantling their Medicaid operations entirely (and losing all the sunk costs). Not a lot of leverage… Read More

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Summary ESRX was running at close to maximum capacity at its mail facilities while MHS has room to spare. ESRX is facing a scenario of significantly increased demand as greater mail penetration is achieved in the Wellpoint book and lacked the capacity to meet this demand. Similarly, ESRX would not be able to meet increased demand from reform coverage expansion. By combining, ESRX avoided having to build a new facility and the combined entity appears to have enough capacity to close at least one older mail facility. Given that a new facility can cost $140M or more,… Read More

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UNH’s decision to take the commercial PBM business in-house did not force MHS into ESRX’s arms: I would argue that it removed the major roadblock to what the companies wanted to do anyway. MHS and ESRX had been talking about a merger off and on for few years (per WSJ reporting) and the logic (laid out below) is compelling but FTC concerns must have kept getting in the way. UNH’s decision doubled the size of its PBM subsidiary in terms of lives (somewhat less in terms of scripts because the legacy Medicare business has a lot more scripts per… Read More

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Payflex is an administrator of account-based benefits including HSAs, HRAs, FSAs and COBRA benefits. The company has $58M in revenues, 1M individual consumer accounts and 3,300 employer customers. On Monday, Aetna accounced plans to acquire the company for $202M. The acquisition pricing looks rich relative to the other benchmark out there: Wageworks is a competitor about 2x the size of Payflex and which recently filed an IPO to sell 23% of the company for $75M (in the works at least since April and described in detail in the registration statement submitted on Tuesday). Wageworks’ 2010 revenues were $115M,… Read More

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Highmark will invest up to $475M in the West Penn Allegheny Health System, a move characterized as a prelude to purchase. This is no bold move to drive closer integration of information flows and care decisions or align incentives in a transformative vertically integrated model. My take: this is about desperately propping up the last competing provider standing in a highly concentrated hospital market. Highmark’s hand was forced by West Penn’s financial bleed out. But, in response, UPMC has thrown down the gauntlet in a move that will reshape the Western PA market. Some background: West Penn is… Read More

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Summary Wellpoint probably paid full value for Caremore (if that company’s performance is as powerful as limited data suggests) but did not overpay. In addition, Caremore offers several powerful upsides if Wellpoint can continue to grow the model. However, Wellpoint will need to tread carefully to avoid damaging its purchase, given an uncertain record with vertical models (NextRx) and the inherent challenges in integrating fast-growing, PE-fueled innovators into large, mature businesses. Some indicator of Wellpoint’s strategy for Caremore will be given by its approach to Arizona — a key market for Caremore but where HCSC – not… Read More

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Summary: Blue Shield of California (BSC) has committed to keeping profits at 2% of revenues or less (and returning any excess). The commitment is economically meaningful: $180M of 2010 revenues will be returned; just a few years ago, BSC made 4.9% net income and, under its promise, would have had to return 2.9% of revenues. However, given BSC’s very large reserves, it has plenty of capital to fund investments or, if necessary, absorb losses. While the PR aspects of the move are interesting, it seems unlikely that this is an attempt to defuse public support for rate… Read More

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Yesterday, McKinsey released a report suggesting that 30% of employers will definitely or probably stop sponsoring health insurance after the Federal reform “big bang” in 2014. Although disputed by the White House per press reports and the methodology details are limited in the published article, there are four good reasons to think the McKinsey survey could be correct: Contradictory studies (Urban Institute in January 2011 and RAND in April 2011) use simulation methodologies while McKinsey did a survey. With a change as transformative as Federal health care reform, simulation parameters estimated based on historical behavior… Read More

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Summary Massachusetts small group went from an average actuarial value (share of expected medical costs covered by the benefit) of 85% in Q1-07 to 73% in Q4-09. In the same timeframe, actuarial benefit levels in another state for which we could find data (Wisconsin) held steady. Given that this trend was well underway in 2007/08, only a portion of the change can be attributed to the economy. The rest may well be a result of 2006 Massachusetts healthcare reform. If true, back-of-the-envelope analysis suggests 50-70% of the decline in actuarial value was reform driven, the rest recession driven. Read More

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Summary  Self-insurance is growing among smaller groups (including those sized 50-250) From a competitive point of view, it will be hard for insurers holding attractive groups in risk products to respond given the enormous profit cannibalization of converting from risk to an ASO offering But they will need to find some solution: risk products today are expensive for many groups given continuing low levels of utilization; “peanut-butter” share nationals at the forefront of these products (Cigna and now Aetna) won’t have cannibalization worries to stop them from pushing the model The channel may provide some temporary breathing… Read More