Does Health Care M & A Usually Pan Out?

Most corporate transactions are sold on the basis of value creation–more market share, leading to higher prices; a new geography; new products; lower costs and so on.  A paper for the Deloitte Center for Health Solutions examines whether health plan merger and acquisition transactions have given shareholders and other stakeholders the promised benefits.   (Deloitte Paper)   The analysis looked at 44 transactions occurring between 2006 and 2012, comparing the rationale for the merger or acquisition and the actual results.  The analysis should be of interest to the sector because health plan transactions are occurring more frequently  and the implementation of the reform law is expected to accelerate the trend.  Plans are most often looking for greater market power, partly to combat what they view as increasing pricing power among the providers they contract with.  Some plans are looking for new product areas, like Medicare or Medicaid, which they view as offering better growth and profit potential than existing business lines.

It has long been recognized that many transactions in any industry have disappointing short, medium and long term returns.  Which makes sense, since sellers presumably have some sense of when the value of their businesses has peaked.  For the eleven publicly traded health plan companies whose M&A activity Deloitte analyzed for this paper, the stock price of the acquiring company certainly didn’t often get the boost the firm was hoping for.  Looking at the price one and three years after the acquisition, and comparing that to an index, only about half the deals were associated with a price increase above the mean in one year and only about 40% after three years.  Other indicators were also mixed.  Earnings per share were generally improved, but it is hard to assign that to the deals.  Medical loss ratios were largely unchanged.  And analyst ratings usually fell.  There was great variation among the acquiring companies, some seemed to do very well at getting value and some consistently did not.