|Source:||Indianapolis Star (IN)|
Sept. 15–WellPoint used a string of mega-mergers over the past decade to grow into the largest for-profit U.S. health insurer.
Now — faced with looming profit pressures and a likely industry shake-up stemming from health-care reform — the Indianapolis-based company may be ready to start gobbling up rivals again.
“We are well positioned for (mergers and acquisitions),” said WellPoint Chief Financial Officer Wayne DeVeydt, speaking this week at an investor conference in New York. “Scale absolutely is going to matter.”
Indianapolis-based WellPoint already is a behemoth. It provides coverage to 33.5 million people, the most of any U.S. for-profit insurer, and operates Blue Cross and Blue Shield plans in 14 states, including Indiana. WellPoint, with $65 billion in revenue, ranks No. 31 on the Fortune 500 list of the nation’s biggest companies.
WellPoint has the money to make deals. A recent research note from Credit Suisse analyst Charles Boorady estimated WellPoint would have $2.8 billion in cash by the end of the year.
Dave Shove, analyst with BMO Capital Markets, said changes from reform — including tighter margins and more standardized products — could help to spur market consolidation. He added that WellPoint would be particularly interested in acquiring any available Blue Cross or Blue Shield plans.
Blue Cross and Blue Shield Association rules prohibit companies such as WellPoint from acquiring nonprofit Blue plans. But Shove said Horizon Blue Cross Blue Shield of New Jersey, which has considered converting to for-profit status, is a natural target.
WellPoint already owns Blue plans in New York and Connecticut, so acquiring the New Jersey plan would allow the company to surround the lucrative New York City market.
“It’d be perfect,” Shove said. “It’d really complete the puzzle.”
Some health-care providers, however, are cool to the idea of insurance consolidation.
“Insurance industry consolidation may increase insurance company profits, but at the expense of patients and health-care providers,” said Daniel Evans, chief executive officer of Indianapolis-based hospital system Clarian Health.
WellPoint was created through a series of deals. In 2004, Anthem of Indianapolis acquired WellPoint Health Networks of California for $20.8 billion. The next year, the new company — renamed WellPoint — bought New York-based WellChoice for $6.8 billion.
DeVeydt also sees reasons for WellPoint to get bigger and predicts industry consolidation.
Larger companies likely would be better able to absorb health-care reforms that require health insurers spend at least 80 or 85 cents of each premium dollar on health care, he said. Typically, plans in the individual market — expected to expand in the coming years amid reform — have higher marketing and administrative costs and spend much less than that on actual medical care.
DeVeydt said that gives insurers much less of a margin to operate within, making scale and efficiency more important.
“Ultimately for us, it’s going to be very important that we maintain enough capital at the parent, or enough liquidity and ability to leverage up, to be able to do transactions, because I really do think they’re going to present themselves over the next couple of years,” he said. “I think you’ll see further consolidation in this industry, significantly more than what we have seen over the last four, five years.”
Shove said a marriage between industry leaders such as Cigna or Aetna could be possible. But he downplayed any potential deal between the two biggest players, WellPoint and Minnesota-based UnitedHealth Group. He said that was unlikely because of antitrust concerns.
Call Star reporter Daniel Lee at (317) 444-6311.
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