Bloomberg News

UnitedHealth Agrees to Buy Managed-Care Provider XLHealth

November 29, 2011

(Updates with price in second paragraph.)

Nov. 22 (Bloomberg) -- UnitedHealth Group Inc., the largest U.S. health insurer by sales, said it will buy XLHealth Corp., a provider of managed care for chronically ill Medicare members, to strengthen a growth area likely to gain increasing support from the U.S. government as it trims costs.

The purchase price was about $2 billion, according to a person familiar with the deal who asked not to be identified because the price wasn’t disclosed. The all-cash agreement will be completed in the first half of 2012 and is expected to add to earnings per share, Minnetonka, Minnesota-based UnitedHealth said in a statement today.

Revenue from managed-care plans for Medicare, the U.S. program for the elderly and disabled, may rise by $10 billion by 2015 as baby boomers retire, analysts have said. The purchase of XLHealth, with 111,000 members, is the seventh since Jan. 1 involving companies that manage Medicare coverage.

“This deal makes a lot of sense for UnitedHealth,” said Sheryl Skolnick, an analyst at CRT Capital LLC in Stamford, Connecticut, in a phone interview. Managed-care “is likely to get a lot more attention from the federal and state governments in an effort to reduce costs. This will give UnitedHealth even more expertise in an area that’s apt to be growing and more certain than the commercial side of the business.”

XLHealth, owned by MatlinPatterson Global Advisers and based in Baltimore, estimates 2012 sales will exceed $2 billion. The companies didn’t disclose further financial details.

UnitedHealth fell 2 cents to $44.42 at the close of New York trading. The shares have gained 23 percent so far this year.

Dual Eligibles

Controlling costs for the chronically ill has become a focus for the commercial insurers and government, said Sarah James, an analyst at Wedbush Securities Inc. in Los Angeles. While 20 percent of 58 million Medicaid beneficiaries nationally are considered chronically ill, they account for 80 percent of the dollars spent, she said.

Medicaid is a joint state-federal health plan for low- income Americans. Half of XLHealth’s population is considered dual eligibles, which means they qualify for Medicare and Medicaid coverage, said Jessica Pappas, a company spokeswoman.

Texas, Florida, Georgia, Ohio and Washington are among states that have begun to move dual-eligible patients into managed care plans to help reduce spending and better coordinate care, James said. The federal government has given grants to 15 states, including California, to find ways to reduce spending on the group, she said.

Plans Lower Costs

“Managed care plans have integrated disease and case management programs that can materially lower cost of care,” James said in an e-mail.

These growth opportunities spell more acquisitions ahead among those with Medicare and dual-eligible programs. Among possible targets are WellCare Health Plans Inc. in Tampa Florida; Universal American Corp. in Rye Brook, New York; Coventry Health Care Inc. in Bethesda, Maryland; and Health Net Inc. in Woodland Hills, California.

“We’re in the early stages of industry consolidation,” Chris Rigg, an analyst at Susquehanna Financial Group in New York, said in a telephone interview. “The industry is very fragmented. XLHealth was a leader but after that it falls off the cliff.”

Medicare Advantage

Getting bigger will help insurers who face greater regulation of Medicare Advantage plans and limited profit opportunities under the U.S. health overhaul law, Rigg said. Medicare Advantage is a federal program in which commercial insurers sell managed-care plans to Medicare beneficiaries. They cover and help coordinate medical services, physician fees and hospitalizations.

Begun in 1997, XLHealth focuses on patients with diabetes, heart disease and other chronic illnesses. Jefferies Group Inc. advised XLHealth on the transaction.

UnitedHealth serves the most Medicare customers, with more than 7 million as of Sept. 30, company filings show. Humana Inc., in Louisville, Kentucky, is second with 4.3 million.

The purchase follows an agreement by Cigna Corp., the fifth-largest health insurer, to buy Healthspring Inc., another Medicare managed-care company, for $3.8 billion on Oct. 24.

Similar purchases in the area of managing the chronically ill include the takeover of CareMore Health Group by WellPoint Inc. in June and Nashville, Tennessee-based Inspiris by UnitedHealth at the beginning of the year.

Baby Boomers

The first baby boomers -- people born from 1946 to 1964 -- are turning 65 this year, a factor that’s likely to boost revenue for insurers who manage such plans by $10 billion in the next five years, Wedbush’s James wrote in an Oct. 24 report.

“All the players in the managed care sector are focused on the senior population,” said Christian Hilliard, senior vice president of Healthcare Investment Banking at Jefferies in New York, which is advising XLHealth during the sale. With the chronically ill, “technology and coordination of care can make an impact by improving care and reducing costs.”

“I expect you will continue to see more acquisitions in the Medicare sector,” he said.

UnitedHealth didn’t hire an adviser.

--With assistance from Jeffrey McCracken in New York. Editors: Chris Staiti, Andrew Pollack

To contact the reporter on this story: Pat Wechsler in New York at pwechsler@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net


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