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Deloitte: Health plan mergers don't always create value

Health insurance company mergers and acquisitions don't always provide incremental value according to a new report from industry consulting company Deloitte. 

"Whether for growth or survival," Deloitte researchers Paul Keckley, Sheryl Coughlin and Leslie Korenda say, the U.S. health insurance industry has seen a high pace of merger deals, as insurers diversified, sought to expand geographic reach, adapted to health reform and tried to find economies of scale.

Studying 44 health plan acquisitions from 2006 to 2012, they found that "such deals can be a 50-50 proposition at best" when it comes to financial value creation.

All but one of the plans had increased revenue and earnings per share in the months following the deal. But changes in the health plans' medical loss ratios -- a key indicator of profit margins --was negligible after three years, and by the three-year mark, only 40 percent had a higher growth in price per share compared to the industry average, the Deloitte researchers found.

One year after the merger, 55 percent of acquiring plans increased their value, compared to the industry index growth, but with widely varying results, ranging from a 66 percent gain to a 78 percent loss. Three years post-merger, 39 percent had increased in value more than the industry average over the same period, with the rest seeing little or no gains.

Health insurance company mergers and acquisitions don't always provide incremental value according to a new report from industry consulting company Deloitte.

The findings, the researcher wrote, "do not necessarily invalidate the intention of building value through M&A... in our experience, that potential can dissipate without an effective formula for the set-up, the transaction, and the post-deal integration of people, workflows, infrastructure, and focus around a well constructed and widely understood strategy."

Hospital and health system consolidation has increased in recent years, along with industries like media, food, manufacturing and information technology, subject to the same ebbs and flows of Wall Street. The Deloitte study does show the health insurance industry uniquely in transition, as "some players expand vertically, some pursue new market segments through horizontal acquisitions and others are absorbed and disappear."

Diversification in locations and markets has been a key part of recent strategies for various insurers, as it has been for providers.

As Cigna and Aetna enter emerging insurance and health services markets in Asia, UnitedHealth Group is turning to Latin America, as it completes a 90 percent stake deal with Amil Participacoes, one of Brazil's largest private healthcare companies. UnitedHealth Group, via its tech unit Optum, also "has a rich history of acquiring Massachusetts-based health IT companies," as the Boston Business Journal wrote recently.

Cigna saw large growth in 2012 as it expanded internationally and entered Medicare Advantage with the $3.8 billion purchase of insurer Health Spring, while Aetna is in the process of acquiring Coventry Health Care for $5.7 billion.

As health insurance companies try to reinvent themselves, facing the confluence of health reform rules and a decline of traditional business models, the Deloitte researchers says that mergers "are important, but going big is no sure bet for unlocking value."

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