The two deals are distinct, but together suggest the health care industry is increasingly turning to consolidation as a way to cope with smaller profit margins and higher compliance costs that many anticipate when the federal government’s health care reforms under the Affordable Care Act take effect.
Aetna is the nation’s third-largest insurance provider, and its planned purchase of Coventry follows similar large acquisitions: Cigna bought HealthSpring earlier this year, and WellPoint last month announced plans to acquire Amerigroup.
The government’s health care reform will likely shrink insurers’ profits margins, health care analysts said, because they will no longer be able to deny individuals with pre-existing conditions, and at the same time must limit how much they raise their rates.
“The regulatory limitations on their margins mean that to drive profitability, they need to get leverage on [sales, general and administration], said David Windley, an analyst with Jefferies & Co. “In order to do that, they need to be bigger.”
The Coventry deal will add 5 million members to Aetna’s existing pool of 36.7 million enrollees, and both companies stand to benefit from the combined consumer base — making similar mergers likely in the future. The deal will help Aetna reduce overhead costs, and boost Coventry’s ability to market to more consumers on state-run health insurance exchanges. Exchanges are online marketplaces that states must build by 2014 to help consumers shop for plans offered by private insurers.
“I think the Coventry move is directly related to the ACA and general business issues of wanting to get more business and be bigger,” said attorney Mark Stember, who chairs the health and welfare practice at Kilpatrick Townsend & Stockton.
Because insurers are facing new pressures to contain overhead — an ACA provision known as the medical loss ratio requires them to limit spending on administrative costs and salaries to 20 percent, so they can spend at least 80 percent of premium dollars on medical care — they will be looking for ways to reduce overhead expenses. Acquiring smaller insurers to boost enrollment could be the way to do it.
“[Insurers] already have all the computer systems in place to process claims,” Stember said. “Adding additional people onto that same network doesn’t cost that much, and at the same time they can get rid of extra costs and overhead that is duplicative [through layoffs] ... You’re going to see more of this type of consolidation in the insurance industry because the idea is for insurers to get more enrollees so they can more easily spread the overhead costs.”
Expanding geographic reach also gives insurers a broader consumer base to market to on the insurance exchanges.
“If you’re a business like Coventry and you’re only operating in certain states, you’d only be able to market in that particular state’s exchange,” Stember said. “Aetna already operates in 50 states ... it gives Coventry bigger access to all those other states and makes it easier for them to list products on those exchanges.”
By law, a real estate investment trust such as Health Care REIT cannot both own and operate its real estate, and Sunrise will likely continue to be run independently. Still, many health care experts predict nursing homes, senior communities and other long-term care facilities will follow a similar path of consolidation because small and mid-size operators will struggle to afford compliance costs.