Worcester Business Journal

8 Worcester Business Journal | March 20, 2017 | wbjournal.com Fallon Health Headquarters: Worcester Membership: 227,461 2014 2015 2016 Revenue $1.3B $1.2B $1.2B Operating income ($11.5M) ($17.5M) ($28.6M) Net income $3.5M ($6.8M) ($20.1M) Source: Fallon Health earnings reports Harvard Pilgrim Health Care Headquarters: Wellesley Membership: 1,281,246 2014 2015 2016 Revenue $2.5B $2.7B $3.1B Operating income ($18.2M) ($78.8M) ($91.3M) Net income $8.4M ($54.8M) ($48.5M) Source: Harvard Pilgrim Health Care earnings reports Tufts Health Plan Headquarters: Watertown Membership: 1,110,169 2014 2015 2016 Revenue $4.3B $4.2B $4.6B Operating income $7.1M ($139K) ($53.5M) Net income $59.1M $29.1M $3M Source: Tufts Insurer losses Three out of four of Massachusetts' largest health plans posted operating losses in 2016. Blue Cross Blue Shield of Massachusetts, the largest in the state, reported a small operating surplus. W ith court decisions blocking mergers of the nation's top health insurers, it's likely those compa- nies will look to acquire smaller, regional players in order to diversify their busi- nesses, according to Morningstar senior analyst Vishnu Lekraj. Lekraj, who covers Connecticut-based insurance giant Cigna for the Chicago investment researcher Morningstar, said small insurance companies are vul- nerable to acquisition because of the multiyear loss- es they've posted in the last two to three years as the cost of risk has increased. "They can't absorb losses forever," Lekraj said. Lekraj referred to failed merger attempts by Cigna and Anthem, and Aetna and Humana, earlier this year as evidence that major insurers will not be successful in combining with each other, and will likely look for smaller partners to stay profitable. Lekraj didn't comment on which smaller insurance com- panies may be candidates for acquisition, but his comments came about a week after three of the four of Massachusetts' largest health insurers posted significant losses in 2016. Eric Linzer, executive vice president at the Massachusetts Association of Health Plans (MAHP), said Lekraj's predic- tion is mere speculation with- out consideration for the unique insur- ance marketplace in Massachusetts. Linzer said Massachusetts is a highly regulated place to do business, with the state requiring that 88 cents of every premium dollar paid go directly to the cost of medical care. The Affordable Care Act requirement is lower, at 80 cents. In addition, Linzer said state health insurers remain viable with cash on hand, despite recent losses. "They all have very strong financial reserves in place, and this is a competi- tive marketplace for any health plan to operate," Linzer said. Shrinking cash positions While Blue Cross Blue Shield of Massachusetts, the state's largest insurer in terms of membership, was able to produce a small operating profit last year, Worcester-based Fallon Health, Tufts Health Plan of Watertown and Wellesley-based Harvard Pilgrim Health Care all posted 2016 operating losses that were greater than those in 2015; Fallon Health and Harvard Pilgrim also posted net losses, while Tufts Health Plan eked out $3 million in net income last year. In earnings statements and interviews, local insurance industry leaders attribut- ed losses to a host of factors, from the high cost of prescription drugs to increased utilization, but executives at individual health plans were tight-lipped on Lekraj's prediction that insurance giants like Cigna, Anthem and Humana are interested in acquiring them. All three boast high net assets, mean- ing they can take losses for several years before being forced to look for compa- nies to buy them out. Fallon reported $191.5 million in assets at the end of 2015. Havard Pilgrim had $947.6 mil- lion, and Tufts had $1.1 billion, accord- ing to 2014 tax filings. These positions were reported before their 2016 losses, so Fallon and Harvard Pilgrim would have lower in net assets. Attempts to reach positive margins Carrie Wattu, corporate communica- tions manager for Fallon Health, said the 40-year-old company "remains fully committed to our mission and to the communities we serve. We continue to invest in and grow many of our prod- ucts and services in Massachusetts as well as in Western New York State." Linzer underscored the need for a concerted effort among healthcare pro- viders and drug makers to help lower the cost of health care in the Bay State. The MAHP's legislative agenda for 2017 includes measures that Linzer said are aimed at lowering the cost of care. MAHP would like to see a new requirement for drug companies to par- ticipate in the state Health Policy Erik Linzer, executive vice president, Massachusetts Association of Health Plans Acquisition targets? Years of losses make local insurers attractive to larger companies, but Mass. firms still have plenty of cash and time to right the ship BY EMILY MICUCCI Worcester Business Journal Staff Writer Richard Burke, CEO of Fallon Health, which has reported two straight years of losses but still has more than $150 million in net assets. P H O T O / B R A D K A N E

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