The Movement to Managed Care (MCO) Creates Merger Mania

In the environment of Accountable Care and Healthcare Reform, more and more states are driving care of the Medicaid recipients to Managed Care Companies.  These companies are to ensure that appropriate care is provided to “enrollees” through a network of qualified providers.  They are also in charge of ensuring that care which is provided is done so in a fiscally responsible manner and have to balance the provision of the highest quality care, with the best outcomes, in the least cost intensive manner.  It is an enormous undertaking which is being driven at the state level, and one in which an environment of “eat or be eaten” is emerging as mergers and acquisitions are ramping up for both Managed Care Organizations and Healthcare Providers.

MCO Mergers and Acquisitions

With the entrance of the Affordable Care Act, which calls for major investments in infrastructure, and expansion of larger covered populations, many of the smaller Managed  Care Organizations are struggling to determine how they will cover all of the costs on the horizon.  The stakes are raised more for those organizations who will be looking to cover dual eligibles- those who are eligible for both Medicaid and Medicare.  Currently the state and federal government spend roughly $300billion dollars per year on 9 million dual eligibles.  With a fixed population to care for, and a limited amount of funds, smaller MCOs are expected to see a struggle in containment of costs.

This began to lead to speculation of mergers in 2012, which is already coming to fruition.  Mergers will allow larger organizations to take a bigger piece of the financial pie to take care of recipients and allows for the division of administrative costs over many facilities.  Implementation costs are expected to prove challenging from a financial viability standpoint for the smaller MCOs which may not see enough cost savings to implement some of the called for modifications of the Affordable Care Act.  Additionally, larger MCOs will have the benefit of expanding their provider networks, and with massive consolidated power may be able to leverage this to their advantage when negotiating contract rates for hospitals and physicians, especially those who are largely dependent upon Medicaid/Medicare for their practice revenue.

Large MCOs currently may additionally be hampered.  With a saturated market and stagnant growth, the only future growth opportunity may lie in the acquisition or consolidation of other smaller MCOs which often target a small, localized, or specialized market.  Of course potential mergers are not limited to the larger MCOs.  There is a decided move toward consolidation of MCOs of smaller size who are taking into account the potential impact of Waiver 1115, an experimental Waiver which some have predicted may leave opportunity for the unwinding of mid sized MCOs.  The basic thought for some of the smaller MCOs is that mergers and consolidation now will put them in a position where they are “too big to be unraveled” with the implementation of Waiver 1115, and is leading to the consolidation of many smaller organizations hoping to boost their numbers for added stability and a stronger bargaining stance in the face of further reform uncertainty.

Predictions Bearing True

In 2012 Barron’s Financial Magazine predicted a frenzy of mergers and acquisitions and listed the following companies as “tasty acquisitions” for larger groups:

Providers Rush to Go Big or Go Home

with the emphasis on MCO consolidations, there is a trickle down effect impacting providers who realize that in order to position themselves from a negotiating standpoint with these large organizations, they have to become larger themselves.  The MCOs are contracted to administer Medicaid funds, and while they are not directly responsible for setting payment rates for providers, they can control who is included in their provider network.  Additional concern is popping up related to an “all products” clause.  The “all products” clause basically necessitates that a provider participate in all of an insurers networks if they want to be included in any of them at all.  This give enormous power to MCOs and insurers and leaves Providers and Physicians at the mercy of large organizations.  Failure to gain inclusion into a state run Mediciad MCO Network, for a provider group that has relied upon Medicaid patients as their primary population can spell financial doom for small practices.  Both physicians and hospital groups are now looking to merge and consolidate in order to gain more effective collective bargaining power in the face of enormous MCOs.