The Health Care M&A Monthly: March Madness, Or Managed Care Merger Mania

Whenever legislators turn their attention to health care and attempt to reform or even just tweak the laws, providers, payors and everybody in between start to get nervous and put their hands on their wallets. Our readers will recall the ambiguous results of the Balanced Budget Act of 1997 on the home health care industry as it strangled reimbursement to providers, forcing many small operators to sell out to larger enterprises or close up shop altogether.
So it comes as no surprise that the Medicare Drug Improvement and Modernization Act of 2003 (DIMA) sent some shivers up the collective backs of those in the health care industry when President Bush signed it into law last December 8. Some of those shivers now appear to have turned into tingly good feelings as health care insurers, in particular, think that they see novel opportunities for growth under the new law.
The law specifically provides some tasty remedies in reimbursement protocols to reverse the exodus of insurers from the Medicare+Choice option. It is believed that the rates for these plans, renamed Medicare Advantage in DIMA, will now represent a new reimbursement protocol in which rates are largely equivalent to fee-for-service Medicare, which is music to payor’s ears.
Sensing that the government will direct more money to Medicare and, perhaps, Medicaid plans, several health insurers have announced deals to acquire managed care plans in the past four weeks. In fact, the seven deals announced in the past month is equal to the seven deals announced in Q4:03.
DIMA also made provisions to establish between 10 and 50 regional PPOs, each at least the size of a state. The statute defines a regional PPO as a "Medicare Advantage regional plan." Further, the law imposes a moratorium for 2006-2007 on local Medicare Advantage plans that were not offered before December 31, 2005. This offers potential buyers strong motivation to accelerate plans to acquire the relevant kind of MCOs earlier than later.
Universal American Financial Corp. (NASDAQ: UHCO) decided it could speed its entry into this market by acquiring Heritage Health Systems of Houston, Texas. A portfolio company of The Carlyle Group, Heritage is an MCO specializing in Medicare, with 15,700 members and $132 million in annualized revenue.
UHCO is paying $98 million in cash, which works out to 0.74x revenue, or 9.0x projected 2004 pre-tax income. This deal, which the buyer expects to be immediately accretive to earnings, is to be financed with $34 million in cash on hand and the proceeds from a new credit facility from Bank of America. Banc of America Securities, LLC acted as financial advisor to the buyer.
Molina Healthcare (NYSE: MOH) announced two deals in the past four weeks. In the first, it is acquiring Health Care Horizons, which is based in Albuquerque, New Mexico and is the parent of Cimarron Health Plan, which has approximately 66,000 Medicaid members and 42,000 commercial members.
Molina is paying $74 million ($69 million in cash, $5 million in assumed bank debt) for the privilege of entering the New Mexico market. The deal is valued at 0.28x revenue and $1,121 per enrollee. However, these figures may ultimately have to be revised down the line since MOH intends to divest the commercial membership and concentrate on the Medicaid members.
In the second deal, Molina is acquiring the Medicaid and Basic Health Plan managed care membership of Premera Blue Cross which has 43,000 and 23,000 enrollees, respectively. By acquiring the membership of the Bothell, Washington-based Blues plan, MOH would increase its total membership to 260,000, making it the state’s largest Medicaid provider.
UnitedHealth Group’s (NYSE: UNH) subsidiary AmeriChoice, based in Vienna, Virginia, announced plans to acquire Great Lakes Health Plan, the second largest Medicaid HMO in Michigan with 96,000 enrollees after Detroit’s Wellness Plan.
UNH is paying $27 million, which works out to $281 per enrollee, or 0.15x revenue. With this deal AmeriChoice will have nearly 1.3 million members in 11 states. Why the low price? Great Lakes had been operating under state supervision because it failed to meet financial requirements. Though it was doing better than most (three other Medicaid HMOs were under rehabilitation, Michigan’s euphemism for reorganization), Great Lakes most likely reasoned that it could not survive long without the resources of a larger organization.
The WellCare Group, a Tampa, Florida-based Medicaid managed care program that serves 555,000 enrollees in Florida, Connecticut and New York, is looking to expand. Just after submitting its S-1 to the SEC, WellCare announced plans to buy Chicago-based Harmony Health Care, a Medicaid program which serves 85,000 enrollees in Illinois. Harmony also takes part in the Hoosier Healthwise program in neighboring Indiana. Harmony, the largest of the five Medicaid plans that contract with the state of Illinois, has been looking for a buyer for some months now.
As a footnote to this trend, we finally note the proposed reverse merger of Miami-based Uniphyd Corporation with e-4Music Networks (OTCBB: EMUC), a publicly traded corporate shell. Uniphyd, which will be the survivor, is an MCO developing Medicare managed care plans in Florida and the rest of the country. However, it has some serious distance to cover before it can close the gap with other players in the field.
If this month’s activity in the Medicare and Medicaid arenas is a taste of things to come, we may expect to see an increase in deals targeting various Medicare and Medicaid managed care plans, particularly from specialists in the latter group such as Centene Corp. (NYSE: CNC) and Amerigroup (NYSE: AGP).
Some insurers will seek to re-enter markets that they abandoned when reimbursement looked dim. Humana (NYSE: HUM), for example, plans to return to the northern Florida Medicare market, which it left in 2000 when it sold its business, covering 86,000 members, to WellCare. Humana also left similar markets in Texas and Wisconsin, but we currently have no indication whether HUM will return to them as well.
An additional consequence of DIMA is that insurers will also seek to build up their PPO holdings in order to qualify as regional PPOs under the law. Although some payors may attempt to build PPO networks from scratch, we may expect to a number to take advantage of existing PPOs by buying and consolidating them.