Love seems to be in the air for health insurers this week.
Investors are driving publicly traded health insurers’ stocks higher based on speculation that the biggest players in the market, Anthem Inc. (NYSE:ANTM) and UnitedHealth Group Inc. (NYSE:UNH), are in the mood for romance.
Enrollment is high, profits at most big health insurers have been strong, and health insurers with the means to extend their private Medicare plan operations seem to have an itch to do so.
Market watchers have suggested that one constraint on mergers and acquisitions (M&A) activity may be antitrust concerns.
Brian Wright, a securities analyst at Sterne Agee CRT, has run the numbers and tried to see which big insurers might have to give up the most business, for antitrust reasons, if they got hitched.
He says UnitedHealth and Aetna Inc. (NYSE:AET) would have market share over 20 percent in 24 states, and that Anthem and Humana would combine for market share over 20 percent in 14 states. If Anthem bought Humana, it would probably have to sell Humana’s commercial insurance operations to some other company, but it could also get a big boost from merging its pharmacy benefits manager (PBM) unit with Humana’s PBM unit, Wright says.
Securities analysts are also trying to determine how various types of Supreme Court rulings on King v. Burwell (Case Number 14-114) could affect the health insurer M&A game.
One possible M&A driver that has come up less often is insurer concerns about the Patient Protection and Affordable Care Act (PPACA) “three R’s” risk-management programs.
A temporary reinsurance program, funded by all insurers, is supposed to protect individual health insurers against catastrophic claim risk.
A temporary risk corridors program is supposed to use cash from successful insurers to protect exchange plan issuers with weak operating results.
A permanent risk-adjustment program is supposed to use cash from insurers with relatively low-risk enrollees to help plans with more than their fair share of high-risk enrollees.
The performance of the programs may be crucial to some insurers’ survival, yet insurers may not even know for sure how the programs worked for 2014 until sometime in 2016, or even later, if appeals drag on.
The Center for Consumer Information & Insurance Oversight (CCIIO) has been holding webinars telling insurers how to feed data into the three R’s programs, and it has said it will try to tell insurers about their reinsurance and risk-adjustment program “receivables” and “payables” by June 30.
The receivables are the money the companies hope to get from the programs. The payable is the amount a company may have to pay into the risk-adjustment program.
For a look at reasons those receivable and payable numbers could affect M&A appetite, read on.
1. Insurers are not sure how quickly they’ll understand how, and whether, the three R’s will work.
The Centers for Medicare & Medicaid Services (CMS), CCIIO’s parent, has already acknowledged that the PPACA reinsurance program is likely to get only $10 billion of the $12 billion in anticipated in revenue.
CMS had hoped to pay reinsurance program profits into the Treasury, but it’s now just hoping to have enough cash to pay claims.
An analyst at Standard & Poor’s Rating Services has estimated the risk corridors program may get only 10 cents in cash from thriving insurers for every $1 of cash that could, in theory, be going to insurers with bad results.
Other PPACA programs have generally started slowly and suffered from glitches, and the U.S. Government Accountability Office (GAO) has reported finding evidence that the three R’s programs may be starting slowly, suffering from glitches, and leaving insurers feeling stranded.