Cigna Buys HealthSource, Inc., Increases Managed Care Clout

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CEO SUMMARY: Consolidation continues among managed care companies. Cigna’s acquisition is an effort to boost its managed care business. Healthsource’s market coverage complements areas where Cigna can use the additional market strength to negotiate more favorable contracts with providers.

HEALTHCARE CONSOLIDATION continues with Cigna Corp.’s agreement to purchase Healthsource, Inc. for $1.4 billion. The acquisition will boost Cigna’s managed care lives to 3.16 million and fee-for-service lives to almost 9 million.

Cigna’s action is driven by the need to gain a critical mass of lives, particularly in regions where it does not have enough enrollees to negotiate aggressive discounts from physicians and other providers.

For clinical laboratories, consolidation among national managed care companies is a sign that these companies are having difficulty competing with integrated delivery systems in some localities. Last year Aetna purchased U.S. Healthcare because it needed additional expertise to organize HMOs throughout the United States as quickly as possible.

Cigna’s acquisition of Healthsource will not be trouble-free. Healthsource reported poor earnings during the fourth quarter of 1996. It was created by a group of doctors in 1985 to provide HMO services primarily to smaller cities and rural areas. Healthsource grew quickly through acquisitions. But as prices tightened and costs increased, management had difficulty maintaining profitability.

Cigna will not only have to integrate Healthsource into the company, but it will also have to successfully manage Healthsource’s problems. That will tax the management team at Cigna. It may provide an opportunity for local competitors who are nimble to gain market share at Cigna’s expense.

Expect other mergers among managed care companies. The chart below illustrates the disparity between United Healthcare, Aetna and Humana at the top, and those managed care companies further down the list.

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