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Business Title: Carlyle Group Joins Hunt for U.S. Health-Plan Acquisitions Private-equity firms Carlyle Group and GTCR Golder Rauner LLC are looking to buy medical insurers, made newly attractive by a surge of customers expected from the U.S. health-care overhaul. Buyout managers are focused on health plans with enrollment of 500,000 or less, particularly those specializing in coverage for the poor, said Chip Clark, a partner at New York-based Ernst & Young LLP, who advises potential buyers. If those companies stay independent, they may struggle with new taxes and regulations from the overhaul signed into law in March, he said. The legislation will add $100 billion in taxes on insurers during the next decade and limit administrative expenses, executive pay and premiums. By 2020, the law also may add 16 million people into government-funded Medicaid programs, often administered by private companies, said David Katz, a principal at Chicago-based GTCR, which has invested $8 billion since 1980. “We’re trying to figure out how to build good companies that help the existing Medicaid managed-care companies, as well as the various state Medicaid agencies,” Katz said in an interview. Medicaid programs, funded by the federal government and the states, cover low-income people. Carlyle sees medical insurers as “an attractive investment opportunity,” said Karen Bechtel, the managing director who heads the company’s health-care team. Carlyle “will likely continue to make investments in this sector,” she said in an e- mail. The company, based in Washington, is the second-biggest private-equity firm, after Blackstone Group LP in New York. Largest Insurers Investors such as Carlyle buy companies and sell them later, often to larger players in the same industry or by arranging initial public offerings of stock. The largest health insurers, UnitedHealth Group Inc. of Minnetonka, Minnesota, and WellPoint Inc. of Indianapolis, have grown partly through acquisitions. The firms are also looking at commercial insurers and those administering Medicare, the U.S. plan for the elderly and disabled, according to a health-care industry consultant who said he had spoken with partners at Carlyle and GTCR. The consultant spoke on the condition of anonymity because he wasn’t authorized to disclose clients’ thinking. The health law cuts $130 billion in subsidies to private plans that administer Medicare. While that may make the business less attractive, the law leaves industry a role in a program expected to grow as the U.S. population ages, said Thomas A. Scully, a general partner at Welsh, Carson, Anderson & Stowe, a New York-based private-equity firm with $20 billion in assets. ‘Great Place to Be’ “I don’t think Medicare reform has been anywhere as bad as people think, and I think Medicaid is a great place to be,” said Scully, who led the Centers for Medicare and Medicaid Services, the Baltimore-based federal agency, from 2001 through 2003. Scully expects “a lot of deals by the end of this year,” he said in an interview. Scully declined to discuss Welsh Carson’s plans. While insurers can outbid private-equity firms in most cases, the added interest may force publicly traded companies to pay more or speed up acquisitions, said Ana Gupte, an insurance- industry analyst at Sanford C. Bernstein & Co. in New York. The firms may raise costs for Coventry Health Care Inc., a Bethesda, Maryland-based insurer that’s specialized in snapping up smaller rivals, she said in an interview. Coventry Deal Coventry had 4.84 million members as of March 31, according to a regulatory filing. The company has agreed to acquire MHP Inc., a 180,000-member health plan now owned by the Sisters of Mercy Health System in Chesterfield, Missouri, according to a June 30 statement. While the terms weren’t disclosed, Gupte estimated the cost of the purchase at $100 million. Drew Asher, Coventry’s senior vice president for corporate finance, didn’t respond to a request for comment on July 8. Candidates for consolidation include more than 100 commercial insurers, about 240 offering Medicare, and as many as 165 with Medicaid, Gupte said. The companies have 500,000 or fewer members each, she said. “The industry has this very fragmented tail that could benefit from some streamlining and consolidation,” Gupte said. Buyout firms “could pick them up at fairly good prices and then make them more efficient” by modernizing computer systems or cutting staff. “Then when the overhang lifts from health- reform, they could flip them” to larger insurers, she said. Judging by enrollment, Arcadian Health, a closely held, Oakland, California-based plan offering Medicare policies to 65,000 seniors, and AvMed Health Plans, a Miami-based insurer with 300,000 members, may be the kind of targets that would interest private-equity firms, Gupte said. Gupte knows of no offer for either, she said. Arcadian Inquiries Arcadian has gotten inquiries from private-equity and insurance-company suitors alike, and expects interest to increase as the effects of the health-care law become clearer, said Robert Fahlman, the plan’s chief executive officer. Arcadian isn’t for sale, and sees opportunity to grow on its own as Medicare rolls expand, Fahlman said in an interview. “The transactions you’re going to see out there right now, the acquirers are bottom-fishing for price and valuation,” he said. “Our investors and our board are very patient and they’re in it for the long-term.” AvMed Health Plans is owned by Gainesville, Florida-BASED SantaFe HealthCare Inc. AvMed “is not looking to partner with anyone,” said Conchita Ruiz-Topinka, a spokeswoman for SantaFe HealthCare and AvMed, in an e-mail. “We think our Florida focus and strong local ties will serve us well in this new era.” ‘Middle-Market Companies’ Among buyout firms, “middle-market” companies seeking transactions valued at $500 million to $1 billion are showing the most interest, said Clark, the Ernst & Young partner. “We have had these conversations,” Clark said in an interview. “With the state of impending change that there is in health care, they see some opportunities, and maybe see some of these opportunities ahead of some other potential buyers.” Private-equity firms may find a niche partnering with Medicaid insurers looking to grow, said J. Andrew Cowherd, a managing director at Peter J. Solomon Co., a New York-based adviser to investment banks. Amerigroup Corp. of Virginia Beach, Virginia, and Centene Corp. of St. Louis are among Medicaid specialists that may need help consolidating smaller rivals, Cowherd said in an interview. The private-equity firms “would be their bank account to go do some acquisitions,” Cowherd said. Tara Wall, an Amerigroup spokeswoman, and Deanne Lane, a Centene spokeswoman, didn’t return calls seeking comment.
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