In mid-February, Humana announced it will pull out of the Affordable Care Act (ACA), also known as Obamacare, in 2018. The health insurer said the underlying issue was an “unbalanced risk pool.” In withdrawing from the Healthcare Exchanges, Humana joined other large payers such as UnitedHealthcare, Aetna and Blue Cross Blue Shield (in several states) that no longer offer coverage because of the heavy losses they sustained on the Exchanges.

In the same week that a federal judge blocked the proposed mega-merger between Anthem and Cigna, Mark Bertolini, CEO of industry rival Aetna, told the Wall Street Journal that the ACA is in a “death spiral.” Perhaps Bertolini is just bitter over the federal ruling in January that blocked Aetna’s own merger with Humana and left Aetna on the hook for a $1 billion breakup fee.

Perhaps, but it still doesn’t change the facts: ACA healthcare plans have caused insurance carriers considerable pain. Carriers have sought to manage that pain by partnering. But federal judges have refused to allow any sort of “treatment” that includes industry consolidation. The judges rightfully feared that reduced competition would lead to higher healthcare costs. One of the major ironies here is that consolidation among insurers, and among providers, is a direct result of strict ACA regulations, which were designed to improve care and lower costs. You might say the ACA is a prime example of the cure being worse than the disease.

So What’s Ahead for Healthcare M&A?

Over the past several years, the ACA has been the miracle elixir for healthcare M&A, and while I’m not bearish on healthcare, change is coming. Republicans have announced their American Health Care Act and have begun the effort to repeal Obamacare.

Still, deals will get done. As the ACA unravels, healthcare M&A activity will shift. It will move away from expensive, asset-heavy models like hospitals, which must treat patients regardless of their ability to pay, to asset-light ancillary service models, such as free-standing urgent care clinics, diagnostic centers, and nursing facilities that all have the advantage of much lower fixed costs and no requirement to treat patients who cannot pay. It is in these care facilities that M&A opportunities will be found.

Obamacare’s catch 22

Aetna pulls back

Humana and Aetna blocked

Death Spiral

Blocking of Anthem-Cigna

Humana press release

About the Author

Ryan Duschak  |  Vice President
Phone: (214)694-2253