Commercial health insurers in Europe have prospered by finding ways to participate in government health insurance programs or complement the government programs.
Many large commercial health insurers in the United States seem to be preparing for the possibility that the Patient Protection and Affordable Care Act of 2010 (PPACA) will reshape the U.S. health care system along European lines by ramping up their own Medicaid, Medicare and supplement insurance products units.
Cigna Corp., Bloomfield, Conn. (NYSE:CI), took a step in that direction earlier this month when it announced plans to acquire the Austin, Texas-based Great American Supplemental Benefits business from American Financial Group Inc.(NYSE:AFG), Cincinnati, for about $295 million in cash.
Cigna and American Financial hope to get the approvals they need to close on the deal sometime this summer or fall.
Cigna jumped into the Medicare Advantage market in January by acquiring HealthSpring Inc., Nashville, Tenn., for $3.8 billion. HealthSpring is known for its finesse at running Medicare Advantage provider networks.
Great American sells a number of senior markets products, including Medicare supplement, or Medigap, insurance. It also sells individual critical illness insurance, cancer insurance and accidental injury insurance.
The Great American Medigap and critical illness businesses generated about $34 million in operating income in 2011 on $325 million in revenue, $191 million in reserves and $400 million in assets.
American Financial decided to de-emphasize the sale of supplemental health products in the third quarter of 2010, and it sold a career agency unit that had helped distribute the products in the fourth quarter of 2010.
American Financial is keeping a unit at the Great American Supplemental Benefits business that had been selling long-term care insurance (LTCI).
American Financial says it is making the deal to focus more narrowly on its core property-casualty operations and get cash it can use to buy back company stock.
Thomas Richards, president of the individual and family plans business at Cigna, says the transaction will open up opportunities both for Cigna distributors and the independent agents who have been selling Great American supplemental products.
Cigna has been wanting to add U.S. individual critical illness insurance products and Medigap products for years, and the company believes Cigna distributors will be happy to get access to the Great American products, Richards says.
Great American agents should also get access to Cigna products, Richards say.
If Cigna had tried to build a Medigap business and a supplemental health business from scratch, “it would have taken a long time,” Richards says.
The Great American deal also could open up opportunities for consumers who are eligible for Medicare to move back and forth more easily between the Medigap products developed by Great American and the Medicare Advantage plans developed by HealthSpring, Richards says.
Richards says he believes the deal will make sense no matter how government efforts to implement PPACA progress, or fail to progress.
“There’s a great market for these products,” Richards says.
As Americans grow older, they will be looking for the kinds of Medigap products and other senior markets products, such as senior dental plans, that Great American sells, Richards says.
Younger consumers can use critical illness insurance to fill the kinds of gaps in major medical coverage that are likely to persist no matter what happens with PPACA, Richards adds.
Scott Robinson and Ellen Fagin, analysts at Moody’s Investors Service, New York, say in a commentary on the deal that adding the Great American operations should help Cigna diversify its earnings and premium revenue.
“For Cigna, which has primarily been focused on the large group market, this acquisition fits in with the company’s growth strategy of ‘go individual,’” the Moody’s analysts say. “Given the current uncertainty around the health care reform law and the unsettled health care environment, we expect to see more health care companies seeking opportunities to build more diverse revenue and earnings streams.”