A Time to Buy

In much of the insurance industry, the recent fashion among carriers has been to divest themselves of operational units whose output is out of line with an increasingly narrow definition of the company's core competency. But in the high-transaction-volume business of health insurance, in which many carriers offer business process outsourcing to other insurers, the vogue is to beef up a company's core competency by acquiring technology vendors.

Recent activity has included BlueCross BlueShield of South Carolina's (BCBSSC; Columbia) acquisition of Docfinity vendor Optical Image Technology (OIT; State College, Pa.); BlueCross BlueShield of Tennessee's (BCBST; Chattanooga) purchase of Gordian Health Solutions, a Nashville, Tenn.-based provider of population health management services for midsize to large companies; CIGNA (Philadelphia) subsidiary CIGNA HealthCare's acquisition of Manchester, N.H.-based Choicelinx, a provider of Internet-related, consumer-oriented technology services to carriers and third-party administrators; and Medical Mutual of Ohio's (Cleveland) technology subsidiary Antares Management Solutions' acquisition of GeniSys (Toronto), a life insurance business process outsourcing firm.

Self-Reinvention

Typically, the reported rationale behind the acquisitions tends to focus on the continuing shift to consumerism in healthcare and the accompanying technology capability needed to support it. "Healthcare plans are reinventing themselves to provide more information and services for their members so the members can become smarter users/purchasers of healthcare," explains Bill Steverson, a spokesman for BCBST. "Consumers are asking for this - employers are looking at their total healthcare costs and searching for ways to help their employees not only keep health costs down, but be well, avoid absenteeism, be more productive, etc."

While such statements help account for health insurers' need to increase their consumer-focused capabilities, they don't necessarily shed much light upon why they are increasingly acquiring vendors, rather than simply buying vendors' software and services. A likely explanation is the intensifying pace of the consumer-directed health trend, and the increasing burdens it places on already-taxed insurers, postulates DeLeys Brandman, vice president, health plan services, First Consulting Group (FCG; Long Beach, Calif.). "Health plans are struggling with the number of new business processes that they have to implement - including those associated with evolving technologies allowing companies to be more agile and support business process change - with the move away from legacy systems to the Web and, increasingly, now multichannel kinds of transactions," Brandman says.

Brandman notes a trend over the last few years of big, technologically sophisticated plans leveraging their technology investments in providing such services for others. Such companies have increasingly found it cheaper to buy such functionality rather than build it, and more-entrepreneurial firms are finding value in buying not merely solutions, but solution providers.

"These plans may have the technical sophistication, but typically aren't as sophisticated when it comes to sales and marketing," Brandman observes. "But, in addition to growing by word of mouth and through local or regional customers that they might collaborate with in one way or another, they are able now to buy customers and sales force activities through these acquisitions."

Acquiring More Than Technology

Such reasoning fueled BCBSSC's acquisition of OIT, according to Mike Mizeur, president of Companion Capital Management (Columbia, S.C.), the BCBSSC subsidiary that purchased the vendor. "We don't do an acquisition like OIT based on the technology itself," he says. "A key reason is that they also have an existing customer base, revenue stream and profit stream to go along with it."

Mizeur sees the spate of acquisitions as more a matter of quantity than quality. "Consolidation in the industry is nothing new, but as [the market] becomes more and more competitive, those companies with the best technology and the best workflows associated with business processing are the companies that are going to survive because it is, historically, a lower-margin, highly competitive environment," he argues.

Because of the accelerating pace of change in the health insurance market, the best way to become a business process outsourcing leader is through acquisition rather than a traditional partnership agreement or trying to develop in-house expertise, according to David Gordon, senior vice president of product marketing, CIGNA HealthCare. "Along with greater choice, consumers are looking for information to help them make decisions about their options," he adds. "In order to be able to deliver on that, there needs to be a continuing creative look on how best to deliver in an accelerating market - the rapid pace of change causes us to continually reexamine the best way to deliver capabilities."

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio