HealthSpring deal shows commercial appeal of ACOs
By Bill McConnell

Cigna Corp.'s proposed $3.8 billion purchase of HealthSpring Inc. is an endorsement of Washington's plan to promote accountable care organizations as a way to both cut health expenditures and improve quality of care.

A core component of the new healthcare reform law, ACOs allow healthcare providers to coordinate care, particularly among the elderly and chronically ill, to ensure that patients follow their prescribed treatment regimens and to eliminate duplicative or conflicting treatments from multiple doctors.

ACOs were authorized by the healthcare reform law enacted in 2010 and will be rolled out for Medicare patients in January. The government predicts that more private insurers will eventually adopt the ACO model.

Although the Department of Health and Human Services has estimated that utilization of ACOs could save Medicare $960 million over the next three years and $5 billion over the next decade, critics of the new healthcare reform law say the purported savings are largely theoretical.

HealthSpring has already made ACO-like collaborations with physicians a centerpiece of its business model and now Cigna plans to adopt those practices and spread them throughout its commercial network, well before authors of healthcare reform have anticipated.

Bloomfield, Conn.-based Cigna is a global provider of health and life insurance with 66 million customers in 30 countries. One of Cigna's primary health insurance lines is assisting large corporations to provide self-funded programs.

Cigna itself has made tentative steps in promoting collaborations with physicians, both to improve quality of care and to cut costs.

"We do believe philosophically that at the core, aligning the physicians' incentives and engaging with them in a more partnered model, using information, including clinical quality, is the sustainable way to drive forward," Cigna CEO David Cordani told analysts during a conference call when the deal was announced Oct. 24. "In the commercial space Cigna has seen good progress in that area in the last three to four years."

Paula Wade, an analyst with HealthLeaders-InterStudy, said HealthSpring has successfully used collaborations with physicians to gain a strong foothold in both the Medicare Advantage and Medicare prescription programs.

The company has approximately 340,000 members in 11 states and Washington in its Medicare Advantage program, which was created to allow seniors covered by Medicare to purchase coverage from private plans. More than 800,000 customers nationwide participate in HealthSpring's standalone Medicare prescription drug program.

"HealthSpring has built its Medicare Advantage business using a highly localized approach," Wade said. "They target markets they want to go into and sign provider groups to long-term contracts that involve capitation and cost sharing."

Capitation is a an alternative form of compensation for healthcare providers, that, unlike traditional fee-for-service programs, offers a fixed amount to a provider group for delivering a specified range of services to a patient population for a period of time.

Wade said most ACO models are a mixture of fee-for-service and capitation models. ACOs typically pay providers according to each service they provide, but compares the total payments to an ACO against the predicted cost of treating patients. If the ultimate cost of caring for the patient group is less than expected, then the insurer splits the savings with the provider group. Some ACO deals require providers to cover some of the over-run if the group exceeds projected cost.

Wade predicted more commercial insurers will adopt ACO-style approaches. "Under the healthcare reform law, plans can't cherry pick customers," she said. "Now they really have to manage risk by managing their care. They are looking at the ACO model as a way to incentivize physicians and manage the care of high-risk people in a sustainable way."

HealthSpring CEO Herb Fritch said Cigna's nationwide presence provides an excellent vehicle for expanding the approach his company has developed. "We believe pretty strongly in the model we've built, the physician engagement piece," he told analysts during the Oct. 24 call. "We really felt this was a great platform to take that model to another level."

The deal is expected to face little antitrust risk, given that the companies' only geographic overlap is in Arizona, where both companies offer Medicare Advantage programs. "We think this is highly complimentary from a geographic standpoint," Cordani said. "We have a strong expectation of going through the regulatory process and being able to close in the first half of 2012."

The merger agreement includes a $115 million termination fee. The deal can be canceled if antitrust approval hasn't been obtained by June 24. Cigna can extend the termination date until August, however.

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