By Steve Rosenbush Hoping to tap the market for privatized Medicare services, private equity investor JLL Partners has agreed to buy a 67% interest in an insurer in Puerto Rico for $64 million, BusinessWeek Online has learned. The investment in Medical Card Systems (MCS), the second-largest managed-care organization on the island, is expected to be announced Nov. 22.
JLL, which already owns several hospital companies, will push Medical Card Systems into a new line of business. MCS currently owns health-maintenance organizations for Medicaid patients and the general public. Starting in January, the outfit will offer a completely privatized HMO for Medicare recipients as well.
The new HMO is part of the Medicare Advantage program. It allows Medicare-eligible people across the U.S. an opportunity to purchase Medicare services with lower premiums. "And the range of coverage and the quality is often better than traditional pay-for-service Medicare coverage," JLL Vice-President Stephen Weiss said. People who sign up for Medicare Advantage programs can receive dental, hearing, and prescription-drug coverage that isn't always available to regular Medicare participants.
INFLATIONARY PRESSURE. The Medicare Advantage program, launched in the early 1990s, is popular across the mainland U.S. About 15% of the nation's 40 million residents who are eligible for Medicare sign up for one of the private programs. But in Puerto Rico, only about 8% of those eligible have signed up for a private program.
On a nationwide basis, the program's growth -- in terms of the number of providers -- has actually slowed. It has leveled since 2000 because the 2% annual gain in Medicare Advantage premiums has lagged the health-care market's overall pace of inflation. The latter rose as fast as 5% nationwide in recent years, although the pace is now just under 4%. That's still much higher than the inflation rate of general goods and services, which is likely to climb 2.5% in the coming year. (See BW Online, 11/16/04, "Inflation's Renewed Muscle" .)
But a big opportunity may exist to grow the Medicare Advantage market in Puerto Rico, Weiss says. With proper management, market penetration can match the mainland, where it's nearly twice as high. The potential might even be greater, since many people in Puerto Rico are already familiar with Medicaid-based HMOs. Unlike Medicare, Medicaid is designed for lower-income recipients.
THRIVING CASH FLOW. A new CEO will take over operations of MCS. Founder and current CEO Felipe Benedit will stop down immediately, although he will remain as a consultant and board member. Carlos Munoz, the current president, will add the title of CEO. No additional changes in management or staffing are expected.
JLL has a strong interest in health care. It has invested $450 million in the sector in recent years, producing a return of $2 billion, according to Paul Levy, founder and senior managing director. The New York-based firm's investments include IASIS Healthcare and Advance PCS.
Health care is one of the fastest-growing sectors of the economy, and it generates strong cash flow. That makes it ideal for private equity players, which can use the cash to borrow money and make additional acquisitions. That enables them to build larger companies and sell them within a few years. Given the sector's strong fundamentals, more deals are expected in the industry over the next 12 to 18 months. Rosenbush is a senior writer for BusinessWeek Online