Health insurer CFOs see deals increase

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(Reuters) Wed, May 4 2011  NEW YORK - Large health insurers expect an increase in deals in the industry after last year's U.S. healthcare overhaul made it tougher for smaller companies to compete.

"The M&A climate is heating up," Aetna Inc (AET.N: Quote, Profile, Research, Stock Buzz) Chief Financial Officer Joseph Zubretsky told Reuters in a recent interview. "I think you'll see the larger plans that have significant capital be the consolidators of the small and regional plans."

Zubretsky said such smaller plans are struggling with the fixed costs associated with the new regulations, as well as with rules requiring insurers to spend a certain amount of premiums on medical care as opposed to administrative costs and profit.

"We think all of that has already created a catalyst for M&A activity at the very low end of the health plan market," Zubretsky said.

Wayne DeVeydt, the CFO of WellPoint Inc (WLP.N: Quote, Profile, Research, Stock Buzz), said in a separate interview that the goal of the healthcare overhaul "is to try to keep costs down, and unless you have scale that's very difficult to do."

Zubretsky said that the volatile markets had reduced the level of deal activity because the situation made it difficult to value targets.

"I think you can get your arms around valuation a lot easier today than you could have over the past two years," Zubretsky said.

Aetna, the No. 3 U.S. health insurer, last week announced it was buying Prodigy Health Group, which runs self-funded health plans for mid-size employers, for $600 million.

UnitedHealth Group Inc (UNH.N: Quote, Profile, Research, Stock Buzz) struck several deals in the past year to boost its health service offerings. Humana Inc (HUM.N: Quote, Profile, Research, Stock Buzz) recently bought clinic operator Concentra for $790 million to diversify into the business of providing care.

DeVeydt said that "the pipeline for deals is still quite robust."

But he also said a valuation "disconnect" between how buyers and sellers view assets is preventing more deals. Further, WellPoint has been able to gain enrollment without making purchases, DeVeydt said, pointing to the company's nearly 3 percent increase in membership during the first quarter.

"We've seen a lot of mid-tier players...exit the market. What we are finding in a lot of cases is we can win that membership without having to buy it," DeVeydt said. "Why would I pay a premium at all to get membership if I can win that membership on the open market with no premium?"

WellPoint, the largest U.S. health insurer by membership, remains "very open-minded to acquisitions," DeVeydt said.

"I think you'll see M&A pick up," he said. "I just think it's going to be a little more subtle than maybe people thought."

(Editing by Dave Zimmerman)

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