The environment for mergers and acquisitions (M&A) among U.S. health insurers remains favorable as they continue to seek out diversification and growth opportunities, according to analysts at AM Best.
The rating agency noted in a recent report that health insurers reported record earnings and accumulated a significant amount of cash in 2020.
They also have maintained a heightened appetite for debt amid the prolonged, historically low interest rates in the credit markets.
According to AM Best, beyond traditional M&A activity there has been a notable trend of increasing vertical integration and diversifying into other health services business.
Insurers have been focusing on technology advancements and the entire health care delivery process to make their operations more efficient, including urgent care clinics, hospice facilities, wholesale distributors, provider practices and pharmacy benefit managers (PBM).
AM Best observed that these service capability businesses help to better manage medical costs and also generally have higher margins.
“These initiatives aim to improve patient outcomes, create efficiencies, manage medical expenditures, improve coordination of care, increase access and address gaps in care,” said Jason Hopper, associate director, industry research & analytics at AM Best.
However, prescription drug costs have been a driver of rising costs for health insurers, far outpacing hospital and outpatient costs with expenses rising by more than 4% between 2010 and 2016.
That said, in more recent years, prescription drug expenses have held steady since as fewer new high-priced drugs have come to market.
“The flattening of prescription drug expenses has resulted in a decline in prescription drugs as a share of total benefits paid,” said Bridget Maehr, associate director.
“Although fewer high-cost drugs have come to market in recent years, health insurers are still looking to their PBMs to manage overall spending on pharmaceuticals, especially for specialty drugs.”
AM Best’s analysis shows that some companies have found affiliations to be a better solution than M&A when it comes to eliminating administrative costs and gaining efficiencies.
Affiliations allow larger carriers to leverage their investments in technology, but also provide smaller companies with advanced data analytics and customized solutions that would normally be too expensive for them to implement.