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Navigating the Complexities of Payer Mergers

Everett Crosland, Senior Director, Reimbursement Strategy

February 5, 2016

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“Centene[..] said it agreed to

buy Health Net in a cash-and-

stock deal valued at $6.3

billion…Centene expects the

deal to make it one of the

largest Medicaid managed

care organizations in the

country with about 6 million

members.”

-Chelsey Dulaney, Wall

Street Journal

“Both of these proposed deals [Aetna/Humana, Anthem, Cigna] raise serious

competitive concerns and in addition to conducting a market-by-market analysis, I

believe that the Department of Justice also must scrutinize these mergers together -

all together - as part of a single, national healthcare market. And the goal has to be to

sustain - and enhance, if possible - competition and protecting consumers.”

-Senator Richard Blumenthal (D-CT), Senate Judiciary

Committee hearing on the Changing Health Insurance

Market Landscape

“The concerns about consolidation may be overblown.

When two of the largest companies offering prescription

drug benefits, Express Scripts and Medco Health

Solutions, merged in 2012, many experts were worried

that the market would be significantly less competitive,

many of the fears that were advertised did not come to

pass.”

-Reed Abelson, New York Times

The Pundits’ Take on Mega-Mergers

“More than a dozen state attorneys

general have joined the U.S. Justice

Department's investigation of the

proposed acquisitions of Humana by

Aetna and of Anthem's bid for Cigna

Corp”

-Grace Schneider, USA Today

“Payer consolidation will hurt quality of care.

Unless it Doesn’t. Narrower networks of

providers and increased premiums could erode

quality. Or patient outcomes could improve if

insurers are as interested in quality of car as they

are in market share. It’s complicated.”

-Janet Boivin, RN, HealthLeaders Media

“Anthem just paid $54B

to buy Cigna. No one

knows what will happen

next…America’s health

care system is in

uncharted waters.”

-Dan Diamond,

Forbes

Why All the Buzz?

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“Following a merger, economies of scale will allow

fixed costs to be spread across a larger customer

base and that unit costs per customer for medical

care and pharmaceuticals will be lower for the

merged entity, compared to what they would have

been for the original two entities.”

--Daniel Durham, EVP, America’s

Health Insurance Plans, testimony before the

House Judiciary Committee, September 10, 2015

Sources: Large Carriers and Market Concentration in

Each State, ASPE, HHS, June 7, 2013; Gaynor M.

Town R., Competition in Health Care Markets,

Handbook of Health Economics, Vol. 2, 2012; Hervey

D. et al., How Might Proposed Payer Mergers Impact

State Insurance Markets, Health Affairs, Dec. 2015;

HHI Analysis, Leavitt Partners, 2015.

Min. HHI Score for Highly Concentrated

Markets

0

1,000

2,000

3,000

4,000

5,000

2008 2009 2010 2011 2012 2013

Commercial Health Insurance Markets are Historically Concentrated

National

Increases in HHI

6%-12%

2.5%-3.7%

1.1%-1.8%

.6%-.9%

.3%-.5%

.1%-.2%

0%Includes: Aetna+Humana, Anthem+Cigna, Centene+Health Mergers

Post-Merger Commercial Concentration is Marginal

Nationally, Regionally Disbursed

Tectonic Drivers of Consolidation: Health Reform

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2014-2015 Net Change in Issuers*

2+ 1 0 -1 -2

* State-based HIMs

Excluded

ACA FFMs—Accelerating Issuer Competition

“Today, one of the Company’s competitors announced significant reductions in the performance of their Health Insurance

Marketplace business. […] [Centene’s] Health Insurance Marketplace (HIM) business, primarily focused on individuals below

250% of the federal poverty level, continues to perform in line with expectations.”

-SEC Form 8-K Filing, Centene, referencing UnitedHealth’s comments regarding unprofitability of United’s HIM

book of business, November, 2015

Special Enrollment Skews Markets and

Increases Issuer Risk and Expenses

~6.7M people are eligible for ACA-based

special enrollment on an annual basis.

950K people used special enrollment to get

federally-facilitated coverage in 2015

20%-55% more services are used by special

enrollment beneficiaries than are used by their open

enrollment counterparts

4 Months is the average tenure for a special

enrollee vs. 8-9 months for a the general population

Sources: 2015 Special Enrollment Period Report – February 23 – June 30, 2015, CMS; Sheingold S. et. al., Competition

and Choice in the Health Insurance Marketplaces, 2014-2015: Impact on Premiums , ASPE, HHS, July 30, 2015.

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Tectonic Drivers of Consolidation: Health Reform

27%

22%

42%

9%

Medicaid/Subsidy Expansion—Prioritizing Efficient Management of Newly Subsidized Populations

Medicaid Eligible

Tax Credit Eligible

Ineligible forAssistance

Coverage Gap

Eligibility status of Nat’l

Uninsured Pop. in 2015:

2014

2015

Not ReceivingFinancialAssistance

ReceivingFinancialAssistance

Marketplace Enrollees Represent a Newly

Subsidized Population

“Typically, younger, healthier adults […] need a tax credit to entice them to enroll. When these individuals sign up

for coverage, they improve the risk pool and bring premiums down.”

-Eibner C., Saltzman E., How Do ACA Tax Subsidies Affect Premiums and Enrollment? RAND Corporation

Research Brief, 2015

Sources: Total Marketplace Enrollment and Financial Assistance, Kaiser Family Foundation, 2015.

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Tectonic Drivers of Consolidation: Market Evolution

Top 7 States by Provider-Sponsored Plan (PSP)

Market Share, 2014

OR

27%

UT

36%

AZ

20%

NM

28%

WI

32%WA

19%

MI

19%

10% Average PSP

market share in line of

business

54% of recent

Medicare Advantage plan

entrants are PSPs

28% of hospitals

intend to launch PSPs by

2018

~140K Average

PSP enrollment for top

financially performing

entities

2.4%2.5%

2.6%2.5%

-1.1%

-.8%

Underwriting Margins of Top Performing PSPs vs.

Traditional Issuer Performance

2012

2013

2014

Top PSP

Performance

Traditional Issuer

Performance

“Based on our findings, it appears that some of the most

challenging populations to serve, the elderly and low

income populations, can be successfully managed more

efficiently in a PSP.”

-Provider-sponsored health plans Positioned to

win the health insurance market shift, Deloitte

Market Report, November, 2015

Source: Provider-Sponsored Health Plans, Positioned to Win the Health Insurance Market Shift, Deloitte, 2015;

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Tectonic Drivers of Consolidation: Market Evolution

Growth of Large Employer Direct Contracting

Arrangements

11% 28%

In varying

degrees, currently

directly contracting

with providers and

health systems

Directly

contracting

in 3-5 yrs

53%

Do not intend to

directly contract

Monitoring

8%8%

“[Direct contracting makes a lot of sense to move your insured employee

population to the provider and give the financial incentives to manage them

effectively, which will lower your total costs,[…] there will be a significant

increase among [employers that are large enough.”

-David Muhlstein, Sr. Director, R&D, Leavitt Partners, Leavitt Partners

Report, “Moving Closer: Employers Directly Contracting with

Providers”

Intel + 1 ACO

ACO Expansion Contributes to Growth in

Direction Contracting

Boeing + 2 ACOs

Medica + 4 ACOs

Source: 2014 Health Care Survey, Aon Hewitt;

Analyzing Consolidation by Lives & Contribution

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Payer

Covered

Commercial/

Medicaid MCO

Lives

(In Millions)

Medicare Advantage

Lives

Anthem + Cigna 52.5 Anthem ~ 516K

Cigna ~ 499K

Aetna + Humana 29.0 Aetna ~ 1.3M

Humana ~ 4.0M

UnitedHealthcare 30.5 ~ 4.0M

Kaiser Permanente 8.7 ~ 1.3 M

BCBS Affiliate Plans

(-Anthem BCBS

Plans)

66.7 ~ 812K

37%

39%

11%

11%

2%

Example: COPD Payer Mix

CommercialInsurance

Medicare

Medicaid

Uninsured

Tricare/VA

Further analysis should

discern contribution by

payer; Establish low, base,

high case scenarios for

merged entities

Key considerations:

1) 101: Lives = potential/actuals; contribution=actuals

2) Second tier payers, as measured by membership,

will grow in depth and breadth as merger-related

divestitures are placed with smaller entities and as

smaller entities seek to counterbalance dominant

players

Sources: AHA, Aetna, Humana, Anthem, Cigna merger statements

and earnings reports; COPD Payer Mix, Avalere, 2015.

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Analyzing Consolidation by Book of Business

Post-Merger Commercial Concentration

6%-12%

2.5%-3.7%

1.1%-1.8%

.6%-.9%

.3%-.5%

.1%-.2%

0%

Increases in

HHI

Analyses Include: Aetna+Humana,

Anthem+Cigna, Centene+Health Mergers

34%-38%

11%-19%

5.8%-8.6%

2.4%%-4.8%

1.1%-1.8%

.05%-.09%

0%

Increases in

HHI

Post-Merger Medicare Advantage Concentration

State Change in HHI

Kentucky +18%

Texas +6%

Florida +4%

Illinois +3%

Virginia +1%

Post-Merger Managed Medicaid Concentration*

*For the majority of states, payer concentration in Managed Medicaid will

remain largely unchanged; however, several states will see marginal shifts

Source: Hervey D. et al., How Might Proposed Payer Mergers Impact State

Insurance Markets, Health Affairs, Dec. 2015; HHI Analysis, Leavitt Partners, 2015.

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Conducting a Comprehensive & Integrated Impact

Assessment

Integrated Account Impact

Assessment

PBM/ Trade

Clinical Management--Medical /

HEOR

Employer Relations

HIT/HIE Engagement

Value-based

System/

Institutional Teams

Payer Access-Sales

HCP Sales

Contracting “There's significant value and opportunity for

the combined company [Anthem/Cigna] and

our customers from a better pharmacy

contract. […] That said, we think the timing

couldn't be better for us related to our

Express Scripts agreement coming to close

in 2019, and some key decisions to be made

related to that and Catamaran.”

-Joseph Swedish, Anthem CEO,

Commenting on the likelihood that the

merger with Cigna will prompt

changes in their pharmacy

management and PBM relationships

Considerations for the Road Ahead

• Mergers beget mergers

– Provider-payer tit-for-tat is likely to continue in to the future and to impact patient and market access

• Assess the impact of consolidation for your patients

– Higher premiums are likely to contribute to an increase in high deductible health plan (HDHP) enrollment

– In certain patient populations, HDHPs exhibit significantly higher reversal rates

• Organizing market access teams for the future

– What is the makeup of an effective account team for payers that are increasingly integrated into care

delivery?

– When do certain customers become too big to deny?

– Don’t under estimate the power and reach of regional concentration

• Assess the second tier, as measured by membership, for opportunities based on their position in

the evolving market

– Small and mid-size customers are likely to merge to counterbalance the outsized three

– Unique populations will continue to demand distinctly positioned payers (e.g. PSPs)

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Thank You

Questions & Discussion

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