Magellan Health Services Inc.’s proposed acquisition of Merit Behavioral Care Corp. is the latest in a wave of mergers to hit the increasingly consolidated behavioral health-care industry. Together, the two companies cover 60 million lives in the public and private sectors.
One possible effect of this growing consolidation, several behavioral health experts say, could be to stimulate the creation of local systems to serve the public sector. Wary of mega-companies, state and local governments might be increasingly tempted to consider local alternatives to behavioral health firms.
A decision last month by Pennsylvania’s Allegheny County to contract with a consortium of local providers to provide mental health care is one example of this trend, experts say. County officials selected a new company set up by the University of Pittsburgh Medical Center and St. Francis Health System over larger, more established companies such as OPTIONS Health Care and Value Behavioral Health.
The spate of mergers among behavioral health-care organizations (BHOs) have meant that, increasingly, "states don’t know who they are contracting with," said Colette Croze, a consultant to states and local governments. The massive size of many of the BHOs is "going to make more regionally based companies much more attractive to states and counties,"she said.
Charles G. Ray, chief executive of the National Council for Community Behavioral Healthcare, predicts an increase in non-exclusive relationships among local and state governments and provider groups, although he acknowledges that such multiple relationships pose major administrative challenges.
As for-profit companies get smarter about providing services to disabled populations, Bob Egnew, behavioral health-care director for California’s Monterey County and past president of the National Association of County Behavioral Health Directors, also expects to see more collaborations between for-profits and local government.
"We have already seen a big change in their approach," he said, of large for-profit companies. "Before they saw us (counties) as competitors. Now, they are more willing to partner with us." That is the better marriage, he said—blending their technological expertise with the counties’ long-term experience in serving populations with serious and multiple problems.
"For Merit or Magellan to survive, it must succeed in Montana."—Waxman
In Montana, the proposed merger between Merit and Magellan fueled concerns about the direction of the troubled program. The state signed a five-year, $400 million contract one year ago with CMG Health of Owings Mills, MD and Montana Community Partners (MCP), a partnership of Montana community health centers. Within months of the program’s start-up last spring, CMG announced that it would be acquired by Merit, one of the losing bidders for the program.
The new merger with Magellan comes in the midst of intense criticism of Montana’s program. The president of the partnership of Montana community health centers declared a few weeks ago that the managed behavioral health program was not working and that the state should considered cancelling it. The state is now withholding more than $5 million in payments to Merit.
"For Merit or Magellan to survive, it must succeed in Montana," Merit President and CEO Al Waxman told Gov. Marc Racicot when news broke of the latest merger agreement.
State officials have often felt they had little option but to sit and watch this game of corporate Pac-Man. But Ms. Croze said they are getting smarter about negotiating with for-profit firms.
Increasingly, states and local governments are saying, "Don’t sell us the company’s experience. Sell us the team." They want to know the personnel who will carry out the contract, she said.
Ian Shaffer, M.D., chief medical officer of Value Behavioral Health, which has been put up for sale by its embattled corporate parent, Columbia/HCA Healthcare Corp., urges states to "make sure the principles and values of your program are clearly understood no matter who is there."
Wall Street signalled its concern about the deal when both Standard & Poors and Moody’s Investors Service said they were considering downgrading Magellan’s ratings. S&P cautioned that Magellan "will be burdened with considerable debt" totaling well over $1 billion.
Terms of Magellan’s acquisition of Merit, which must still be approved by federal and state regulators, call for Magellan to offer $460 million in stock and refinance $295 million of Merit’s debt pushing Magellan’s total debt load to $1.3 billion. The combined company will have annual revenue of $1.5 billion. Industry analysts say Merit gives Magellan a sophisticated technological infrastructure as well as substantial experience in the public sector.
In the past four months alone, Magellan has signed agreements that will give it majority control of five BHOS, Merit; Green Spring Health Services, Inc.; Human Affairs International, Inc.; CMG Health Inc.; and Vista Behavioral Health Plan.
Long-term benefits
Clarke Ross, executive director of the American Managed Behavioral Healthcare Association, a trade group, said such mergers can prove beneficial in the long run by creating a single administrative infrastructure for credentialing, network development, claims processing and marketing.
In announcing the acquisition, Magellan Chairman Mac Crawford said that "by identifying and drawing on the best practices from all our organizations, we will be capable of setting an even higher standard of service and care in our industry."
However, the very size of a combined company like that created by the Magellan-Merit merger could also raise questions about efficiency and responsiveness, according to Ms. Croze. "Magellan will have to create companies within a company to get the efficiency it needs and minimize overhead," she said.
Contact Ms. Croze at 302-378-7555; Mr. Ray at 301-984-6200; Mr. Egnew at 408-755-4509; Mr. Petrila at 813-974-9301; NAMI at 703-524-7600; Dr. Shaffer at 703-205-6701; and Mr. Ross at 202-434-4565.
As behavioral health firms get bigger, states may prefer to contract with local provider systems
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