Private equity prepped for a health insurer buying spree?

The commercial health insurance market may be lagging these days (in terms of membership if not profits), but Medicaid managed care is a hot sector under health reform. So it shouldn't be a big surprise that private-equity firms Carlyle Group in Washington, D.C., and GTCR Golder Rauner LLC in Chicago are looking for opportunities to purchase Medicaid health plans with 500,000 or fewer members, reports Bloomberg Businessweek.

But these firms also are seeking to buy commercial insurers and Medicare Advantage plans, according to industry insiders. Health insurers overall represent "an attractive investment opportunity," and Carlyle "will likely continue to make investments in this sector," Managing Director Karen Bechtel told Bloomberg. Buyout firms apparently see opportunities across the board to purchase smaller insurers, make them more efficient and then sell them to larger insurers for a healthy profit. More than 100 commercial insurers are potential buyout candidates, according to Ana Gupte, an industry analyst at Sanford C. Bernstein & Co. in New York.

On the Medicaid front, "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," said David Katz, a principal at GTCR. Private-equity firms may be able to partner with Medicaid insurers that want to implement an acquisition strategy, added J. Andrew Cowherd, a managing director at New York-based Peter J. Solomon Co. For example, Virginia Beach, Va.-based Amerigroup Corp. and Centene Corp. in St. Louis might seek a "bank account" to help them consolidate smaller companies, he said.

As for Medicare Advantage, there is still a role for private health insurance to play despite upcoming reimbursement cuts totaling some $130 billion said Thomas Scully, a general partner at the private-equity firm Welsh, Carson, Anderson & Stowe. Scully, the former head of the Centers for Medicare and Medicaid Services, said that Medicare reform hasn't been "anywhere as bad as people think" and that he anticipates "a lot of deals by the end of this year."

To learn more:
- read this Bloomberg Businessweek article