M A in the Managed Care Era Carl Mercurio President

M&A in the Managed Care Era Carl Mercurio President, Corporate Research Group New Rochelle, NY Who We Are CRG is an independent publishing, research and consulting company specializing in managed healthcare. Founded: January 1993 Acquired by WRG Research in 2005 www.corporateresearchgroup.com 1 Our Products Managed Care Managed Healthcare Market Report HSA Market News Outlook for Managed Care The M&A Explosion World Health Care Congress Healthcare Week in Review Question of the Day More Data or Magic Trick? 2 Today’s Topics Key Drivers of Managed Care M&A M&A Strategies Analysis of Deals, Valuations Implications and Projections Source: Corporate Research Group Types of Mergers Horizontal integration Size and scale Vertical integration Upstream, downstream integration Synergy Conglomeration—”Engulf and Devour” I don’t know anything about this 3 Managed Care M&A Mostly horizontal Health plans buying other plans Some vertical Integration: health plans buying PBMs, behavioral, dental, vision plans Synergy: CVS buying Caremark Key Drivers of M&A Activity Stocks lagging market Premium price competition Slow membership growth SG&A Savings Flat margin growth Source: Corporate Research Group 4 Tale of the Ticker Tape Stock losers (YTD through 10-5-07) Amerigroup, -2% Centene, -11% UnitedHealth, -11% WellPoint, -0.3% Stock winners (YTD through 10-5-07) Aetna, +25% Cigna, +20% Coventry, +21% Health Net, 8% Humana, 29% Source: Corporate Research Group MCO Stocks Lag the Street… YTD through 10-5-07 15% 15% 8% 10% 5% 0% -5% -10% MCOs S&P 500 Dow Nasdaq 13% 10% Source: Corporate Research Group 5 Premium Trends—Commercial 16% 14% 12% 10% 8% 6% 4% 2% 0% '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 Source: Corporate Research Group Employer Rate Hikes, 2008 Duke Univ., 2% T. Rowe Price, 2.5% Calpers, 7.4% MGM Mirage, 9% State of FL, 5% Source: Corporate Research Group State of IL, 9% State of MA, 5% State of OH, 5% State of PA, 7% TX ERS, 9% 6 Rate Trends—Medicare Advan. 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% '99 '00 '01 '02 '03 '04 '05 '06 '07* *after phase out of budget neutrality. Source: CRG At-Risk HMO/POS Membership 80 70 60 50 40 30 20 10 0 1995 1997 1999 2001 2003 2005 2007 Source: Corporate Research Group 7 Commercial Risk Lives, 6/06-6/07 Aetna, +2% Cigna, +2% Health Net, -2% Humana, -8% Coventry, -7% United, +4% WellPoint, +1%* *all fully-insured lives ’07 Medicare Advantage Lives 10 9 8 7 6 5 (in millions) April May June July August Sept. Source: Corporate Research Group 8 MCO Product Profit Contribution Other 26% Commercial Risk 45% Specialty 10% Medicare Advantage 19% Source: CIBC MCO Net Margins, Public Cos. 10% 8% 6% 4% 2% 0% 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 Source: Corporate Research Group 9 Next Stop: M&A Land Plans buying plans Plans buying geographies Plans buying product lines Value of M&A Deals MCO M&A Expenditures, Major Deals ($ in billions) $40 $35 $30 $25 $20 $15 $10 $5 $0 2002 2003 2004 2005 2006 $7 $2 $1 $4 2007 $22 $31 $31 Source: Corporate Research Group 10 Some Top Deals ($ in millions) United-Sierra (pending): $2,334 WellPoint-WellChoice (2005): $6,506 United-PacifiCare (2005): $8,780 Coventry-First Health (2005): $1,700 Anthem-WellPoint (2004): $16,119 United-Oxford (2004): $4,968 Top Deals, cont’d ($ in millions) United-Mamsi (2004): $2,700 Anthem-Trigon (2002): $4,038 WellPoint-RightChoice (2002): $1,442 Aetna-Prudential (1999) $1,100 Aetna-NYLCare (1998): $1,000 11 Others On the Radar Screen Health Net Coventry Humana Pure-play Medicaid plans Benefits, Pitfalls of Horizontal M&A SG&A savings Market clout Smoothing effects, growth potential of geographic expansion, product diversification Goodwill exposure Integration exposure 12 SG&A Synergies 19% 18% 17% 16% 15% 14% 13% 12% 11% 10% 2002 2003 2004 2005 2006 WellPoint United SGA Ratio Source: Corporate Research Group Market Clout 13 Geographic Expansion Geographic Expansion Smoothing effect against regional downturns, disruptions Chance to buy into growth areas, e.g., United-Sierra 14 Product Diversification Product Diversification Smoothing effect Chance to benefit from new and growing new business lines 15 Product Diversification Aetna: Chickering (Student health) Strategic Resource (Part-time workers) Schaller Anderson (Medicaid) UnitedHealth: AmeriChoice (Medicaid) PacifiCare (Medicare) Definity (CDHP) Student Resources (Student health) Product Diversification Anthem-WellPoint WellPoint: Strengths in small group, individual Anthem: Strengths in national 16 Goodwill Exposure 50% 40% 30% 20% 10% 0% Source: CRG United, WellPoint: Goodwill as % of Total Assets 2002 2003 2004 2005 2006 UnitedHealth WellPoint Integration Risks 17 Price/Life—Non BCBS Deals: Price/Life—BCBS Deals: s al de 7 ,1 ) g. Av ('07 ) ra ('05 er e Si ar iC ) c if 4 Pa ('0 rd ) fo 4 Ox ('0 ) SI '02 AM e ( M c oi Ch Am '01) ( tra 0) Vy ( '0 is rr 0) Ha ('0 em '00) M ( X LT NY '00) ( sh Ru 9) ('9 u Pr 8) ('9 L ) NY ('96 HC US s al de ,7 5) g. Av ('0 ice ho lC el 4) W ('0 nt oi lP el W 3) ('0 lt ba Co 2) ('0 on 2) ig ('0 Tr ice ho tC gh 1) Ri ('0 ru Ce an le $2,000 $1,500 $1,000 $500 4500 4000 3500 3000 2500 2000 1500 1000 500 0 $0 18 Price as Multiple of Cash Flow 20 18 16 14 12 10 8 6 4 2 0 Ri gh t Ox Si Av W MA Pa W er el el c if g. fo MS ra lC lPo ,9 rd iC lt ho I( ('0 ar int ('0 ('0 pla ice '04 e 7) ice 3) 5) ('0 ('0 ns )* * )* * ('0 ** ( '0 4) * 5) 5) ** 2) ** ** * Tr ig on ('0 2 Co ba Ch o Price/Life vs. Cash Flow Multiple $3,500 $3,000 $2,500 $2,000 Price/Life $1,500 $1,000 $500 RightChoice FirstHealth WellChoice Cobalt WellPoint Oxford Sierra PacifiCare T rigon MAMSI $0 0 5 10 Cash Flow Multiple 15 20 19 Vertical Integration Specialty Markets CVS-Caremark Specialty Markets Humana Corphealth—Behavioral CompBenefits—Dental WellPoint American Imaging Golden West Dental Magellan Icore National Imaging 20 Should MCOs Sell, Spin PBMs? “More ego than economics” and “not a key success factor for health insurers that can easily outsource the function.” --Charles Boorady, Citigroup PBMs can fetch a high price Funds for further MCO acquisitions Focus on 85% not 15% 3 Reasons Why CVS-Caremark Is a Bad Marriage Conflicts of interest Revenue growth, new product dreams or pipedreams? “Owning the patient” is a tricky proposition Full-disclosure: I own no naked shorts 21 Final Thoughts Further industry consolidation--yes Further product diversification through acquisitions—yes Further specialty deals—yes Not-for-profit M&A deals—yes Clinic support deals--yes Will it all be worthwhile—maybe Thank you. Carl Mercurio, President Corporate Research Group, a division of WRG Research Inc. 481 Main Street., New Rochelle, NY 10801 Phone: 914-235-6000; Fax: 914-235-6002 cm@corporateresearchgroup.com 22 A Brief History of the Health Insurance Industry William R. Sarniak FSA, MAAA Highmark Inc. Society of Actuaries 2007 Annual Meeting Session 68 October 16, 2007 The Future of Health Care… 1 Early Prepaid Plans Prepaid medical plans date back to the 19th century Two plans were established in 1929 A rural farmers’ cooperative plan in Oklahoma was set up by Dr. Michael Shadid Los Angeles Department of Power and Water contracted with Dr. Donald Ross and Dr. H. Clifford Loos to provide medical care for about 2,000 employees and their families Kaiser Permanente In 1933 Dr. Sidney R. Garfield established a prepaid health plan for workers on a construction project in southern California Dr. Garfield established two more plans in 1938 and 1942 at the request of Henry Kaiser to cover employees of Kaiser-managed projects and enterprises In 1945, the Kaiser plans were opened to community enrollment 2 Kaiser Permanente In 1955, Kaiser reorganized into three regions and gave individual physicians a financial stake; membership reached 1 million by 1963 Additional regions were established in 1958 (HI) and 1969 (CO and OH) Membership reached 2 M in 1968 and 3 M in 1976 In 1980, Kaiser acquired a group practice prepayment plan in the Washington, D.C., area, which became Kaiser’s Mid-Atlantic region Kaiser Permanente In 1997 Kaiser purchased a portion of Humana Group Health, Inc., and formed an affiliation with Group Health Cooperative of Puget Sound With these moves, membership approached 9M As of May 2007, membership stood at 8.7 M 3 Blue Cross Blue Shield Plans First prepaid medical plan established in 1917 (Blue Shield symbol was introduced in 1939) First Blue Cross plan established in Dallas in 1929 Voluntary inter-Plan programs to cover members who became ill away from home were developed in the 1940s By 1949, there were 81 Blue Cross plans and 44 Blue Shield plans covering 24 million Americans Blue Cross Blue Shield Plans Membership grew to 87.4 million by 1979 In the 1980s, Blue plans became federally taxable In 1994, the Board of the Blue Cross Blue Shield Association voted to eliminate the requirement that Blue plans be not for profit By 2006, there were 39 Blue plans covering 97 million Americans 4 WellPoint Largest Blue plan 34 million members Blue license in 14 states Blue subsidiaries Anthem Blue Cross of California Blue Cross Blue Shield of Georgia Empire Blue Cross Blue Shield Aetna Aetna Life Insurance Company incorporated – 1853 Began offering health insurance – 1899 Began offering group health policies – 1936 Created HMO subsidiary – 1973 Stopped selling individual health policies – 1990 5 Aetna Merged with U.S. Healthcare – 1996 Acquired NYLCare Health Plans – 1998 Acquired Prudential HealthCare – 1999 Acquired Strategic Resource Company, ActiveHealth Management, HMS Healthcare, Schaller Anderson – 20052007 UnitedHealthcare Company formed – 1977 Introduced Open Access (non-gatekeeper) model – 1984 Acquired MetraHealth – 1995 Acquired Golden Rule Health Plans, Oxford Health Plans, Definity Health – 2004 Acquired PacifiCare, Neighborhood Health Partnership, John Deere Health Care 6 Total Market HMO and PPO Enrollment as of 2006 HMO – 68 million PPO – 108 million M&A Activity Pace of activity shows no signs of slowing 39 deals involving health insurers were completed in 2006 (see following slides) In the broader health care market, the number of deals has increased each year from 2002 through 2006 7 M&A Activity in 2006 HealthNow New York, Inc. acquired Brokerage Concepts, Inc. Meritain Health, Inc. acquired CBSA PERFORMAX HIP Health Plan of New York merged with Group Health, Inc. UnitedHealth Group acquired Arnett HealthPlans MultiPlan, Inc. acquired Private HealthCare Systems, Inc. M&A Activity in 2006 Fallon Community Health Plan acquired UltraBenefits, Inc. UnitedHealth Group acquired Medicaid business of Physician’s Health Plan of Southwest Michigan Aveta Inc. acquired PMC Medicare Choice Care 1st Health Plan acquired UHP Healthcare Health Alliance Plan acquired CuraNet, LLC 8 M&A Activity in 2006 Health Care Service Corp. acquired life and disability business of Highmark, Inc. Meritain Health, Inc. acquired Weyco, Inc. WellPoint, Inc. acquired QualChoice Select, Inc. Centene Corp. acquired Opticare Managed Vision, Inc. CIGNA Corp. acquired Star HRG M&A Activity in 2006 Magellan Health Services, Inc. acquired ICORE Healthcare, Inc. Centene Corp. acquired MediPlan Corp. UnitedHealth Group acquired IBA Health Plans Assurant, Inc. acquired Safeco Financial Institution Solutions, Inc. Centene Corp. acquired Cardium Health Services Corp. 9 M&A Activity in 2006 Humana Inc. acquired CHA HMO, Inc. Medical Mutual of Ohio acquired health insurance business of Summit Insurance Molina Healthcare, Inc. acquired HCLB, Inc. Centene Corp. acquired Health Dimensions of Florida, Inc. Consortium of private equity firms acquired UICI Harvard Pilgrim Health Care, Inc. acquired Benefit Plan Management, Inc. M&A Activity in 2006 Health Net, Inc. acquired Universal Care, Inc. Medical Mutual of Ohio acquired 1st Medical Network, LLC Aetna Inc. acquired disability business of Broadspire Services American Independence Corp. acquired Insurers Administrative Corp. North American Health Plans, Inc. acquired Howard E. Nyhart Co., Inc. 10 M&A Activity in 2006 The Carlyle Group acquired MultiPlan, Inc. UnitedHealth Group acquired John Deere Health Plan Centene Corp. acquired US Script, Inc. Coventry Health Care, Inc. acquired Providers Synergies, L.L.C. Fiserv, Inc. acquired CareGain, Inc. M&A Activity in 2006 HIP Health Plan of New York acquired PerfectHealth Insurance Co. Magellan Health Services, Inc. acquired National Imaging Associates, Inc. MVP Health Care merged with Preferred Care 11 Sources http://www.tmci.org/downloads/BriefHist.pdf http://www.managedcaremuseum.com/History.htm http://newsmedia.kaiserpermanente.org/kpweb/histor ykp/navlinkpage.do?elementId=htmlapp/feature/121hi storykp/nat_historyhighlights.html.xml&repositoryBean =/kp/repositories/ContentRepository http://www.bcbs.com/news/press/facts/blueshistory.html http://www.wellpoint.com/business/about_family.asp http://www.aetna.com/about/aetna/aag/history.html http://www.uhc.com/aboutus/history.htm http://www.aishealth.com/ManagedCare/CompanyIntel /MA.html http://www.levinassociates.com/publications/mam/ma mheadlines/07mamhead/701mamhead.htm 12