Jenks Healthcare Business Report November 2003

	Jenks Healthcare Business Report
November 2003 issue Big Blues Deal, But Trouble Brewing? The largest managed care acquisition ever is announced, but will it mean a new show of strength for the combined companies, or is it a sign of weakness and that the managed care bull market has peaked? See page 1 IPO Market After just four health care IPOs in the first nine months of the year, six are priced in the past four weeks. Their after-market performance, however, does not bode well for the next batch. See page 2 Secondary Market Sales Nine secondary stock offerings are priced, raising $800 million, and six more are files. See page 8 Feature Stories Venture Capital: Although no records were set, venture funding activity was strong, with nearly $500 million raised. See page 7 M&A Market: With the two mammoth managed care deals, the dollar volume for the quarter already exceeds all of the third quarter. See page 10 Profile: 3F Therapeutics The latest in a series of closer looks at firms successfully attracting VC. See page 11 Departments Private Placement Market - 5 Venture Capital Market - 8-9 Notes & Briefs - 12 Sign up for a trial subscription and get the current issue! Read the past headlines.	Big Blues Deal, But Trouble Brewing? We all walked into our offices on the last Monday of October to find out that not one, but two large managed care acquisitions had been announced, one of which was the largest ever in that sector. We are speaking, of course, of Anthem’s (NYSE: ATH) historic $16.4 billion deal to merge with WellPoint Health Networks (NYSE: WLP), and UnitedHealth Group’s (NYSE: UNH) $2.95 billion bid for Mid Atlantic Medical Services (NYSE: MME). Not only are ATH and WLP the largest Blues plans in the country, but the combined entity will become the largest managed care company with nearly 26 million enrollees, edging out UnitedHealth Group which has 18 million medical enrollees. The question that everyone is asking is, Does size really matter? The answer, unfortunately, is yes…and no. In the 1990s, as the hospital acquisition market was peaking in 1997, the most commonly stated rationale for the consolidation in this sector was to be able to cut costs and more effectively negotiate contracts with managed care companies. We have yet to see any studies that determined whether either of these lofty goals were ever achieved. By the end of the decade, hospital reimbursement rates were increasing, but it had more to do with a strong economy and a growing consumer backlash against managed care companies and some of their ill-advised medical decisions that were splashed over the front pages of local newspapers. Some analysts have been stating that the Anthem/WellPoint deal marks the beginning of the end of the recent bull market, and escalating premium hikes, that the managed care industry has enjoyed. The theory is that there is no other way to grow other than by consolidation, and that corporate America will not continue to pay the double-digit premium increases. Unfortunately for businesses and consumers, the huge premium hikes are going to continue for at least another year, according to a recent study by Milliman USA. Respondents to the annual survey said they expected renewal rates in 2004 to increase premiums by an average of 15% across the country, and that 2003 renewal rates were 11% to 16% higher than in 2002. Since Anthem and WellPoint operate in very different markets, the merger will not give them additional negotiating strength at the local hospital level, but with nearly 10% of the nation getting their health insurance from the combined company (to be called WellPoint), it will have power elsewhere. With 26 million people having their prescription drugs paid for by the new WellPoint, the pharmaceutical industry has to be squirming a bit as they can see yet another attack on their pricing policies, with the exception of the generic companies. The old WellPoint has been the most aggressive managed care company in terms of holding down the cost of prescription drugs, promoting the use of generics, and fighting to gain over-the-counter status for some of the most commonly used ones that are low risk. The merger may give consumers more of a choice—meaning a higher co-payment—to use expensive brand name drugs, and WellPoint will be able to put pricing pressure on both generics and brand names purely as a result of its buying power. It is no secret where the pharmaceutical sales force will be deployed next. But if a recent mailing by Anthem is any indication of how long a cohesive strategy may take to roll out, it seems there will be a few bumps in the road. We were told, in a nice highlighted table, that by switching from the local pharmacy to ordering through Anthem Rx Direct Mail Service Pharmacy, we would save money since the co-payment for a particular drug would go from $10 to $20. You do the math. After retrieving the notice from the waste basket, we discovered in the fine print that Anthem was comparing a one-month supply at the local pharmacy (3 times $10) with a three-month supply using Anthem Rx, so the new math does produce a $10 quarterly savings. But who ever reads the fine print? Controlling costs has been a major issue in health care, especially in the past few years with double-digit premium increases based, we are told, on double-digit medical cost inflation. But if you ask doctors if they are better off today than they were three years ago, they will laugh before walking away. The new WellPoint will obviously be the dominant player in the national Blue Cross and Blue Shield Association, which frightens some of the independents. But perhaps they can have some say about wasting money funding studies that only prove the obvious. A case in point is the recent study that determined that new medical technology not only drives demand for that technology, but also increases spending. Hello! If new technology is developed that can do things that could not be done before, of course consumers and their physicians are going to want to use it and of course it will cost more money. In a similar vein, if new drugs are created that can cure, or diminish, medical problems, people will use them and drive up the cost of pharmaceuticals use. What we still don’t know yet is whether as a whole all of these new technologies are saving money in the long run (by reducing other, more costly, interventions), because we haven’t reached the long run yet. Getting back to the Anthem/WellPoint deal, ATH shareholders did not respond favorably to the news, sending Anthem’s shares down by 8% because of the dilution in 2004. By 2006 annual savings from synergies in the merger are expected to be at least $250 million. But don’t expect that to be reflected in a cut in your premium payment any time soon.
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