Years of losses make local insurers attractive to larger companies

PHOTO/BRAD KANE Richard Burke, CEO of Fallon Health

Erik Linzer, executive vice president, Massachusetts Association of Health Plans

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By Emily Micucci

With court decisions blocking mergers of the nation's top health insurers, it's likely those companies will look to acquire smaller, regional players in order to diversify their businesses, according to Morningstar senior analyst Vishnu Lekraj.

Lekraj, who covers Connecticut-based insurance giant Cigna for the Chicago investment researcher Morningstar, said small insurance companies are vulnerable to acquisition because of the multiyear losses they've posted in the last two to three years as the cost of risk has increased.

“They can't absorb losses forever,” Lekraj said.

Lekraj referred to failed merger attempts by Cigna and Anthem, and Aetna and Humana, earlier this year as evidence that major insurers will not be successful in combining with each other, and will likely look for smaller partners to stay profitable. Lekraj didn't comment on which smaller insurance companies may be candidates for acquisition, but his comments came about a week after three of the four of Massachusetts' largest health insurers posted significant losses in 2016.

Eric Linzer, executive vice president at the Massachusetts Association of Health Plans (MAHP), said Lekraj's prediction is mere speculation without consideration for the unique insurance marketplace in Massachusetts.

Linzer said Massachusetts is a highly regulated place to do business, with the state requiring that 88 cents of every premium dollar paid go directly to the cost of medical care. The Affordable Care Act requirement is lower, at 80 cents. In addition, Linzer said state health insurers remain viable with cash on hand, despite recent losses.

“They all have very strong financial reserves in place, and this is a competitive marketplace for any health plan to operate,” Linzer said.

Shrinking cash positions

While Blue Cross Blue Shield of Massachusetts, the state's largest insurer in terms of membership, was able to produce a small operating profit last year, Worcester-based Fallon Health, Tufts Health Plan of Watertown and Wellesley-based Harvard Pilgrim Health Care all posted 2016 operating losses that were greater than those in 2015; Fallon Health and Harvard Pilgrim also posted net losses, while Tufts Health Plan eked out $3 million in net income last year.

In earnings statements and interviews, local insurance industry leaders attributed losses to a host of factors, from the high cost of prescription drugs to increased utilization, but executives at individual health plans were tight-lipped on Lekraj's prediction that insurance giants like Cigna, Anthem and Humana are interested in acquiring them.

All three boast high net assets, meaning they can take losses for several years before being forced to look for companies to buy them out. Fallon reported $191.5 million in assets at the end of 2015. Havard Pilgrim had $947.6 million, and Tufts had $1.1 billion, according to 2014 tax filings.

These positions were reported before their 2016 losses, so Fallon and Harvard Pilgrim would have lower in net assets.

Attempts to reach positive margins

Carrie Wattu, corporate communications manager for Fallon Health, said the 40-year-old company “remains fully committed to our mission and to the communities we serve. We continue to invest in and grow many of our products and services in Massachusetts as well as in Western New York State.”

Linzer underscored the need for a concerted effort among healthcare providers and drug makers to help lower the cost of health care in the Bay State. The MAHP's legislative agenda for 2017 includes measures that Linzer said are aimed at lowering the cost of care.

MAHP would like to see a new requirement for drug companies to participate in the state Health Policy Commission's (HPC) annual cost trends hearing in order to examine increases in prescription drug costs, and for the HPC to have more authority over mergers of healthcare providers. Since December 2013, there have been 72 notices of mergers and affiliations filed with the HPC, and just a handful have gone through a full review.

Fallon refocuses

Fallon executives declined requests for an interview for this story but, after posting an operating loss of $28.6 million and a net loss of $20.1 million on March 1, CEO Richard Burke said in a statement the company is working to aggressively manage administrative expenses.

One step Fallon has taken to refocus the business is the recent sale of Home Staff, the home health business Fallon owned with VNA Care Network. Wattu said the sale has allowed Fallon to free up resources to invest in initiatives that align better with its core products.

Wattu said Fallon has negotiated smarter vendor contracts and invested in new technology for better integration of the core systems. The company is also trying to make healthcare delivery for members more efficient.

“We're … pursuing additional opportunities to work with members and their healthcare providers to ensure the most appropriate care is being delivered at the right time and in the right setting. Emergency room visits, specialty drugs and earlier identification of high-risk members are just a few of the things on which we are focusing our efforts,” Wattu said.

Though Fallon laid off 45 employees in the summer of 2015, Wattu said the company is now adding positions to support its growing government and senior care programs, which will continue to grow as the population ages.

ACA replacement a factor?

Coinciding with the losses by Fallon was the release of an Affordable Care Act replacement bill by Congressional Republicans on March 6, which would repeal the penalty that people have to pay if they don't have health insurance.

Wattu said it is too early to predict how a replacement bill will impact Fallon, and Umesh Kurpad, chief financial officer at Tufts Health Plan, said he doubts the bill would have a substantial impact, as written, at least in the immediate future.

Tufts saw increased utilization in its commercial and Medicaid lines in 2016, which contributed to an operating loss. Yet, Kurpad noted the company's net income was in the black and is focusing on better systems integration, diverse portfolios and contracts with a risk-based component to encourage providers to be efficient.

“We're on to 2017. We're not looking back,” Kurpad said.