Posted on 12 May 2011
In the wake of the federal health-care overhaul that is changing the rules for the industry's core business, major U.S. health insurers, including Aetna Inc., Humana Inc. and WellPoint Inc., are retooling to become more than just health plans.
Diversification plans include stepped up acquisitions and partnerships that will allow the companies to employ doctors directly, deliver health-information technologies, and participate in new hospital-doctor groups known as accountable-care organizations.
Managed-care companies have been on buying sprees before, mostly to gobble up competing insurers and expand their networks and membership. But with the health law stripping thick profit margins from the business of providing health-care benefits, that isn't such a popular strategy anymore.
Insurance profit margins have historically averaged 7% to 8%, said Carl McDonald of Citigroup Investment Research, but the health overhaul—which requires insurers to spend more on medical care instead of profits—is expected to reduce that to between 3% and 5%.
Meanwhile, health IT, especially, is growing briskly, and can command fat margins because of relatively low overhead. UnitedHealth Group Inc., which until recently has been largely alone in its quest to supplement core insurance operations, is expected to earn margins of about 14% this year on its health IT business, and has earned margins higher than 20% in years past, according to Goldman Sachs.
Since 2010, about 20% of deals by managed-care companies involved health IT firms, up from 7% in 2007, while insurers buying other insurers dropped to 27% of the deals from 39% over the same period, according to FactSet Research Systems, a company that ran an analysis on the market.
At Aetna, new Chief Executive Mark Bertolini is implementing a strategy that will see the Hartford, Conn., insurer get more deeply into health-information technology and run the back-end operations of the new accountable-care organizations, or ACOs.
"Our core business is necessary but not sufficient," said Mr. Bertolini. He pledged to transform Aetna into "more than an insurance company."
Earlier this year, Aetna spent $500 million on technology company Medicity, which sells software to securely transmit health data so health-care providers with many different systems can share patient information. Besides commanding higher margins, health IT businesses are expanding due to some $27 billion in federal funding available for hospitals and doctors to computerize their records.
In March, Aetna announced plans to partner with Carilion Clinic in Virginia to build an ACO—a concept outlined in the health law to make the health-care system more interconnected and hold costs down. In late April, Aetna said it was buying Prodigy Health Holdings for $600 million to get more deeply into the business of providing midsized companies with a self-funded insurance option—which Mr. Bertolini pointed to as evidence of further diversification.
In the accountable-care organizations, the hospitals or doctor groups would take on some of the financial risk of caring for patients—the role traditionally played by insurers. Aetna hopes to provide ACOs with the know-how. And even if the law is ultimately repealed, health insurers see opportunities to sell services to help improve how the health system works, which was a major focus of the debate on the overhaul.
"Health-care reform was an action-forcing event: Everyone's antenna is up and saying, 'We've got to change,"' said Mr. Bertolini.Further into the future are plans for a health-care app store. By the end of the year, the insurer hopes consumers will be able to download mobile applications, such as a program that could help patients find doctors much like opentable.com helps diners find restaurants. Already, doctors can install CareSuite, a workflow tool for physician offices. The tools will be available to users regardless of whether Aetna is their insurer.
Reinventing the health-insurance industry has its challenges. Diversification "may take away management focus from the core business and also [runs] the risk that they may not do well in some of these newer areas," said Matthew Borsch, a Goldman Sachs analyst who follows health insurers.
But industry executives point out that newer areas are growing a lot faster than the traditional core business. For instance, specialty businesses, such as stand-alone dental or vision coverage, command margins over 10%, said Mr. McDonald of Citigroup.
He also pointed to the new frontiers that health plans are exploring to export their model overseas, which can bring margins in the teens.
Michael McCallister, chief executive of Humana, is getting into the business of employing doctors and is eyeing home health care because, he said, "these areas are growing faster than the core and will continue to do so." Home health, for instance, commands margins in the midteens, said Sheryl Skolnick, an analyst at CRT Capital Group LLC, and also has the benefit for an insurer of keeping patients at home instead of at costly nursing facilities.
Humana in December spent nearly $800 million to buy Concentra, which runs urgent- and occupational-care clinics in about 40 states. Last month, the company reorganized its business units to better reflect its new diversified structure.
Concentra employs about 1,000 primary-care doctors who are near to where three million Humana members live, the insurer said. Humana hopes the centers can provide an alternative to costly emergency-room care for its members: A typical visit to a Concentra urgent-care clinic costs $190 to $200, including an X-ray, according to the company, while a comparable ER visit would range from $350 to $650 or more, with additional services for X-rays.
The Concentra deal is also a way to capitalize on the looming shortage of primary-care doctors when an estimated 32 million additional people gain coverage in 2014 due to the health law.
Meanwhile, WellPoint earlier this year said it is diversifying more heavily into consumer-oriented and health IT businesses. At an investor conference, the company outlined plans to create a "portfolio of new noncore growth businesses." Chief Financial Officer Wayne DeVeydt said, "WellPoint is actively engaged in a range of partnership discussions with leading technology and consumer companies to redefine health