AET Aetna Inc. (delisted)

UnitedHealthcare, a division of UnitedHealth Group (UNH), announced the completion of the acquisition of privately-held XLHealth Corp, a sponsor of Medicare Advantage health plans for recipients with special needs. The deal was announced in November 2011 and closed well ahead of schedule. UnitedHealth managed to inch ahead in the face of stiff competition from its peers, Aetna Inc. (AET) and WellPoint Inc. (WLP).

XL served 113,000 Medicare Advantage (“MA”) members in Arkansas, Georgia, Maryland, Missouri, South Carolina and Texas, and has expanded to Illinois, Indiana, Iowa, New Mexico, New York and Wisconsin.

XL Health has been a particularly attractive pursuit for insurers owing to its expertise in serving Special Needs Plans (“SNPs”), which includes members with chronic illnesses and dual-eligibles (people who qualify for both Medicare and Medicaid). The SNPs is the most profitable segment of the Medicare Advantage program. Medicare Advantage is a privately run version of the government's Medicare insurance program for the aged and the disabled.

With an increase in the baby boomers population, health insurers see expanding opportunities in this area over the next few years. In fact, in the next 25 years, compounded annual growth rate of the Medicare population is expected to increase to 2.7% from 1.5% at present.

Managed care is expected to get a lot more attention as the federal and state governments try to reduce $1.2 trillion from the federal deficit over the next decade. Major cuts to the Medicare program, whenever it happens, will necessitate a shift in some of the costs to the seniors, making their Medicare Advantage plans more attractive than traditional Medicare plans.  Moreover, many individuals would look forward to supplementing government coverage with private insurance, boosting demand for Medicare Advantage plans.

Dual eligibles have gained a lot of government’s attention of late as they drive up government costs. As a group, dual eligibles cost the state and federal governments a combined $300 billion annually. They comprise 16% of Medicare's enrollees but account for 27% of its spending. According to the Centers for Medicare and Medicaid Services, they make up 15% of Medicaid beneficiaries but draw 39% of its spending.

It is imperative to enhance care options for dual eligibles as the numbers are expected to shoot up with an ageing population and increased life expectancy amongst Americans with disabilities. As such dual eligibles have become an immediate target for spending reductions and quality improvements in care.

America's Health Insurance Plans (“AHIP”), the insurers' trade group, estimates that if all the duals were put into the best managed-care plans, state and federal governments could save as much as $125 billion during the next decade.

Presently, only about 12% to 15% of the duals are covered by private health plans. Federal and state governments are looking to place them into managed care to improve coverage and cut down on wasteful spending and duplicate tests for a population that generates a lot of medical claims.

The integration of XL Health with UnitedHealth is expected to be a major boost to the company’s capabilities in the field. It will enable the company to serve the needs of dual eligibles better and meet the growing demands of this market segment.

The deal is expected to add approximately $2 billion to UnitedHealth’s FY12 revenues and $0.05 to net earnings per share, after integration expenses and investments. Including XLHealth, UnitedHealth expects net earnings of $4.60 – $4.80 per share in FY12. This is an upwards revision from the earnings per share guidance range of $4.55 – $4.75 stated during the fourth quarter earnings release.

The recent acquisition of HealthSpring Inc., a provider of MA plans by CIGNA Corp. (CI), for $3.8 billion was the biggest in this area. Other smaller acquisitions included the purchase of CareMore Health Group by WellPoint Inc. (WLP) in June last year and the Inspiris buyout by UnitedHealth at the beginning of 2011. We expect an increased thrust in the MA market over the next 18-24 months. 

 
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