Acquisitions of Technology Companies in the PHIX Market

imagesOn 11/3/14, Aetna Inc., the third largest U.S. health insurer, announced the acquisition of Chicago based bswift, a software and technology services company that administers public and private health insurance exchanges (PHIX) for consumers and employees. This was a strategic move that strengthens Aetna’s private exchange capabilities. The bswift technology platform will provide Aetna with the capability to deliver a new private-exchange offering for employers of all sizes. Aetna looked at the market and concluded that PHIX technology was so critical to its future growth it had to own the technology. The announcement of this transaction probably caused some heartburn among other carriers building their PHIX strategy around bswift’s platform.

There are some in the industry that believe a conflict of interest is created when a carrier or broker purchases a Private Exchange Technology Company.  Here are some questions that the market is asking:

  1. Will the exchange technology company, now owned by a carrier, be a viable solution for other insurance companies who wish to place their products on the exchange?
  2. Will the “owner carrier” have an unfair competitive advantage over other carriers who place products on that exchange?
  3. Will competitive intelligence about other carrier products, pricing models, underwriting, and customer buying pattern data be protected from being utilized by the “owner carrier”?
  4. Will the new carrier owner provide technology updates to other users of the platform on a timely basis?  At a reasonable cost?
  5. Will the owner of the technology create proprietary features and product advantages that will not be offered to other users of the platform (i.e. carrier competitors)?

This acquisition of a technology company by a health insurer, is similar to that of Bloom Health in 2011.  Bloom Health, based in Minneapolis, is co-owned by a group of BlueCross BlueShield-affiliated companies: WellPoint, Health Care Service Corp. and Blue Cross Blue Shield of Michigan. In 2012 Towers Watson acquired Extend Health for $435 million and in 2013 acquired Liazon Corporation for $215 million. In 2014, Meastro Healthcare Technology announced the acquisition of Florida based Workable Solutions from Alegeus Technologies for an undisclosed sum. What does this trend of consolidation mean?

We think that with each acquisition of a pure-play PHIX technology platform, like Bloom, Liazon and bswift, the remaining independent platforms, like Quadrant 4, hCentive, ConnectedHealth, Array Health and BenfitFocus, get more valuable. The value of each of these companies is maximized by remaining independent.  Exchanges are more valuable to multiple carriers and providers of PHIXs rather than one company.  Should one or two of these companies become publicly traded entities, they will realize their maximum growth and value potential.  Of course, not all will.

The trend of carriers and brokers buying exchange technology companies will most likely continue.  The business relationships that exchanges will have with their constituents/customers in the open market (carriers, brokers, employers, associations, etc) may very well be successful for all.  However, when choosing an exchange solution, this is something employers may want to consider. Here at KTP, we have found that it is worth looking into such criteria as: how these exchanges manage their ownership structure, how they are compensated, and many other criteria before signing on. To view a map of the PHIX market players, please click here.