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Health Plan Valuation Part Four: Valuation and Integration

Health Plan Valuation Part 4 Web

With the anticipated increase in acquisitions and consolidations of health plans, it’s critical that those involved with a transaction develop a reasonable purchase price, perform due diligence to confirm the condition of the health plan being acquired, and then devise a tailored integration plan to realize the expected value.

Valuation Impact on the Merger Integration Process

Health plan consolidations are premised on achieving specific goals, often including:

  • Expansion of market share.
  • Line of business and product diversification.
  • Improved service after investment in member-friendly, scalable systems and processes.
  • Improved quality through more widespread application of care management programs.
  • Cost reductions achieved through:
    • Reduction of administrative cost through functional consolidation to attain economies of scale.
    • Reduction of medical cost through an enhanced negotiating position with providers.

However, one comprehensive study indicated that fewer than half of health plan mergers result in sustained improvement in comparative market value three years after the deal has closed. [1] 1Others have noted that even if cost savings are realized, often they are not passed on to consumers in the form of lower premiums, which can limit member growth.[2]The reasons for these results are numerous, including the declining value of administrative cost reductions in larger-scale transactions with complex multistate organizations.[3] Such observations indicate the need for a focused merger integration plan with feasible goals, clear priorities, and a process to measure results. Designing the valuation process with a view to advancing the integration plan can benefit the transaction significantly by enabling the parties to:

  • Establish Priorities: Not all performance improvement opportunities are created equal—the valuation process can start to identify the magnitude of the opportunity and the ease with which improvement can be achieved, thereby helping establish merger integration priorities or areas for further evaluation. Success often breeds success, and achieving fast gains in the merger integration process can build organizational momentum and commitment to fully realize merger benefits.
  • Set Performance Reporting Benchmarks and Goals: Every integration plan benefits from having starting point benchmarks and clear goals. The valuation sets the performance benchmark for the most recently completed reporting period. Although the valuation expert relies on the representations of management and may not have audited financial information on the most recent year’s performance, the data request and management forecast interview add context to the forecast and enable an experienced valuation expert to gain an understanding of health plan operations. The forecast establishes the initial performance benchmarks and begins to frame the transaction goals that are both achievable and sustainable.
  • IdentifyOpportunities to Realize Objectives: The valuation is the starting point for identifying opportunities for performance improvement that should be prioritized during the merger integration process, realizing transaction objectives, and fashioning the scope of due diligence. Typical opportunities identified during the valuation process include the following:
    • Staff Consolidation: The valuation and due diligence process can reveal proficiencies or deficiencies in a staff’s performance of certain tasks. During the management interview, a portion of the discussion may be devoted to staff capabilities, depending on what the information request discloses.
    • Vendor Consolidation: With valuation customarily identifying significant vendors and contract expiration dates, the acquiring or successor plan can evaluate relevant vendor performance and identify vendor consolidation opportunities. Scale can improve certain asset purchases (e.g., IT infrastructure) or service contracts (e.g., telecom, pharmacy benefit manager, behavioral health purchased benefits). In addition, vendor consolidation can reduce cost and achieve health plan–workforce efficiencies. Understanding the major vendor contracts can help quickly identify opportunities for improvement.
    • Product Consolidation: The administrative cost of maintaining plans can be reduced by product consolidation, but cost reduction may also involve onetime consolidation costs related to transitioning members to a new plan that aligns with their needs. Another opportunity lies in Medicare Advantage. Product consolidation or reconfiguration may result in a CMS contract termination. Quite often, the contracts targeted for termination are performing at less than 4 stars, and the health plan may look to shift members to plans with a 4- or 5-star rating, producing a revenue enhancement with respect to the transitioned membership. In both cases, the risk is member defection.
    • IT Consolidation: A host of options and challenges are associated with IT consolidation. Within health plans, IT functions often align to data storage, network and data management, applications development and support, and analytics and reporting. While these all present potential opportunities, the valuation information request and the management forecast interview will provide the greatest insight on performance of selected applications and the analytics and reporting functions.
    • Revenue Enhancement: The two areas of fastest revenue enhancement are usually risk adjustment and quality program recoveries. Management’s projection of future performance, especially in cases of marked performance improvement in the forecast, can provide quick insight that a significant opportunity can be quickly realized.
    • Provider Contract Consolidation: Often, small plans do not have the resources to implement and support value-based arrangements. In addition, lacking market clout, they tend to accommodate a wide range of payment methodologies to secure the provider agreements necessary to ensure network adequacy. The valuation process can uncover clues to the opportunity that lies within provider contracts.

A carefully planned and executed valuation can provide great insight into the target health plan’s operations and financial condition. In turn, this insight can guide development of certain elements of the due diligence plan and, ultimately, the integration plan. In the context of overall transaction value, the valuation can prove a sound investment that lays the foundation for future success.

Find out how ECG can help your organizations through the critical process.

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  • 1.

    Deloitte, “Unlocking Value in Health Plan M&A: Sometimes the Deals Don’t Deliver,” 2013. The study surveyed health plan merger and acquisition transactions between 2006 and 2011 to reach its conclusion.

  • 2.

    Leemore Dafny, “The Risks of Health Insurance Mergers,”NEJM Catalyst, October 24, 2016.

  • 3.

    Paul von Ebers, “Mega Health Insurance Mergers: Is Bigger Really Better?,” Health Affairs, January 22, 2016.