If Healthcare Reform Fails: We'll Get Stronger Insurance Companies, Weaker Hospitals
The stalling of healthcare reform efforts in Washington has already had a marked impact on hospital stocks, and it may determine the prospects for insurance mergers this year. If hospitals suffer as a result of reform's demise and insurers consolidate for the same reason, it could alter the balance of power in some markets.
According to Thomas Gallucci, an analyst at Lazard Capital Markets, shares of for-profit hospital chains have dropped around 15 percent since Scott Brown's election to the Senate, which undermined the chances of health reform legislation being passed. Gallucci's observation suggests that for-profit hospital stocks have swooned because of concerns that reform won't expand insurance coverage to 30 million Americans -- an expansion that would also generate more revenue for the hospitals. In turn, that suggests admissions could continue to decline in a recessionary environment. If the COBRA subsidy to laid-off workers is not extended through May, that would also be bad news for healthcare providers; but even though that has been stripped from the jobs bill currently being debated, some in the industry believe the provision has enough support to pass later on.
Meanwhile, insurance industry observers predict an increase in health plan acquisitions in 2010, but say that any move to revive health reform could put merger plans back into the deep freeze where they've been for the past year. All told, mergers of healthcare providers, insurance companies, and health services companies plunged from a total value of $44 billion in 2006 to $12.9 billion in 2009. Much of the decline was recession-related, of course, but some of it also stemmed from uncertainty over healthcare reform. Now that reform appears to be dead, analysts and insurance executives are predicting a pickup in M&A activity over the next year.
That may seem counter-intuitive, given the legions of new customers reform would drive to insurance companies. But proposed new taxes on carriers and the requirement that they take all comers without universal coverage deflated any enthusiasm that insurers may have felt about reform.
The other reason why increased consolidation among insurers might seem strange is that 10 insurance companies already control 56 percent of the market. But it's the nature of capitalism for the big to grow bigger by swallowing smaller fry. And as plan membership decreases, acquisitions are the easiest way to grow volume.
But do the insurers have the cash to buy other companies? According to a report by the liberal coalition Healthcare For America Now (HCAN), the five large insurance companies hauled in combined profits of $12.2 billion in 2009, up 56 percent over 2008. At the same time, their total enrollment dropped by 2.7 million people. HCAN contends that they pulled off this feat by cutting the amount they spent on healthcare and transferring the money to administration and profits.
Industry representatives criticized the report, noting that insurers' profits slipped badly in 2008, when many suffered big investment losses. Nevertheless, some insurers have done quite well of late: WellPoint, for example, raked in $4.7 billion in 2009, about half of it from the sale of a pharmacy benefit management subsidiary. WellPoint's margin for the year was 7.3 percent; for Cigna, it was 7.1 percent, and for Humana, 3.4 percent. Aetna, on the other hand, had a 15 percent drop in earnings for the fourth quarter and projects a 2010 deficit. If only because the market is shrinking, insurers will probably resume the consolidation they began several years ago, but only when it's clear whether reform will pass or not. In the interim, companies that have cash on hand will probably buy back stock to boost their share prices.