Consolidation is a trending and ubiquitous topic for organizations in the health care industry as companies begin preparing for effects of the government’s Affordable Care Act, reports a Washington Post article.
As shown in recent industry headlines, many companies are merging and consolidating in an effort to create larger forces to deal with the decreased size of profit margins and increased compliance costs expected to accompany the Affordable Care Act, according to the article.
The Washington Post reports:
Insurance giant Aetna announced it will buy Bethesda-based Coventry Health Care, which provides Medicare and Medicaid services, for $5.7 billion. Two days later, Ohio-based Health Care REIT announced an $845 million deal to acquire McLean’s Sunrise Senior Living, which manages 300 senior living facilities in the United States, Canada and the United Kingdom, including 25 in the Washington region.
Aetna is the nation’s third-largest insurance provider, and its planned purchase of Coventry follows similar large acquisitions: Cigna bought HealthSpring earlier this year, and WellPoint last month announced plans to acquire Amerigroup.
The government’s health care reform will likely shrink insurers’ profits margins, health care analysts said, because they will no longer be able to deny individuals with pre-existing conditions, and at the same time must limit how much they raise their rates.
“The regulatory limitations on their margins mean that to drive profitability, they need to get leverage on [sales, general and administration], said David Windley, an analyst with Jefferies & Co. “In order to do that, they need to be bigger.”
Because insurers are facing new pressures to contain overhead — an ACA provision known as the medical loss ratio requires them to limit spending on administrative costs and salaries to 20 percent, so they can spend at least 80 percent of premium dollars on medical care — they will be looking for ways to reduce overhead expenses. Acquiring smaller insurers to boost enrollment could be the way to do it.
By law, a real estate investment trust such as Health Care REIT cannot both own and operate its real estate, and Sunrise will likely continue to be run independently. Still, many health care experts predict nursing homes, senior communities and other long-term care facilities will follow a similar path of consolidation because small and mid-size operators will struggle to afford compliance costs.
Read the full Washington Post article here
Written by Erin Hegarty