Why Molina is on a Medicaid plan buying spree
Molina Healthcare is on a roll. The health insurer announced plans Tuesday to buy Affinity Health Plan, a small Medicaid company in New York, which would mark the fifth acquisition deal that Molina has disclosed this year.
The Long Beach, Calif.-based Medicaid giant will pay $380 million in cash for nearly all of the assets of Affinity, which serves about 284,000 Medicaid beneficiaries in six New York counties and brings in annual premium revenue of $1.3 billion. Molina expects the deal to close in the second quarter of next year, following approval from regulators.
The addition of Affinity to Molina’s portfolio gives it more membership and revenue. Affinity fits in nicely, both geographically and product-wise, with the other acquisitions Molina has pursued this year. Affinity would be Molina’s fourth acquisition in New York, according to one analyst.
For the past couple of years, Molina has focused on growing its top line by absorbing small Medicaid plans that it can fund using cash on hand without going to the equity or debt markets. Its targets are usually financially underperforming plans that Molina feels it can turn around using its operational expertise. Molina executed its own company overhaul in 2017 and 2018 to eliminate costs before shifting its sights to growing its business this year.
Molina’s CEO Joseph Zubretsky commonly refers to its purchases as “bolt-on, tuck-in acquisitions,” and regards them as similar to organic growth, because of the relatively cheap prices the company pays for the plans.
“Medicaid managed-care lends itself really well to that kind of a strategy,” said Stephen Tanal, managing director of healthcare services at SVB Leerink. “There’s a lot of smaller private Medicaid managed-care plans out there, and understanding the reality that scale matters a lot in healthcare, a lot of those companies might have one or two contracts at the local level, but they lack the scale to lead with more innovative solutions.”
The strategy has proven successful in the past. Centene became the Medicaid behemoth it is today by acquiring small health plans over many years, but Centene is now too big for those small deals to make much of a difference to its earnings, Tanal explained. Centene served about 12.6 million Medicaid members at June 30, whereas Molina served about 3.1 million.
Molina, however, is just the right size—small enough that these acquisitions matter to its bottom line, but large enough to fund them, he said.
Sarah James, senior research analyst at investment firm Piper Sandler, said now’s a good time to be acquiring because health insurers are sitting on a lot of cash, and the valuation of Medicaid plans is lower, due to concerns over the future make-up of the U.S. Supreme Court and how that will affect the outcome of the pending lawsuit challenging the legality of the Affordable Care Act.
Uncertainty over the upcoming presidential election and the budget pressures that states are facing amid the pandemic have also lowered the value of Medicaid plans. Adding Affinity to its New York footprint should reduce Molina’s overhead expenses, James said.
Earlier this year, Molina closed acquisitions of New York-based YourCare Health Plan, which catered to 47,000 Medicaid members, and Passport Health Plan’s Medicaid business serving 315,000 beneficiaries in Kentucky. Molina said YourCare would add $140 million in revenue in 2020 and $280 million in 2021. It expects Passport to provide $850 million of revenue in 2021.
Molina in April announced plans to buy Magellan Complete Care for $820 million in cash. That deal would give Molina an extra 155,000 Medicaid members across six states and add $2.8 billion to Molina’s revenue by 2021, if it is completed by the end of this year.
The insurer also attempted a purchase of Chicago-based Medicaid insurer NextLevel Health, but called off the deal in April. Meanwhile, the company is retreating from Puerto Rico with a sale of its Medicaid business to an on-island competitor.
In total, Molina expects to bring in $21.5 billion in premium revenue next year, a 20% increase over 2020, Zubretsky said during the company’s second quarter earnings call in July. It projected that it would bring in $17.8 billion in premium revenue for 2020, an increase of 10% over 2019.
Tanal said he expects Molina to continue rolling up small Medicaid plans. His research suggests there are 76 Medicaid managed care companies in the United States with less than 100,000 members. Each of those plans would add about 1% to Molina’s earnings if acquired.