Magellan Health Services, Inc. will pay $110 million in cash to buy First Health Services Corp., a Coventry Health Care, Inc. subsidiary that provides pharmacy benefits administration for Medicaid programs, Magellan announced today.
Avon, CT-based Magellan also signed service agreements with Coventry to manage radiology services on a risk basis and to provide oncology management services in five Coventry markets.
Based in Glen Allen, VA, First Health Services Corp. provides pharmacy benefits administration, healthcare management, and IT services to state Medicaid programs. Magellan will pay Coventry $110 million in cash for the stock and other assets of First Health Services. The transaction is expected to close by July 31. Magellan will pay for the acquisition with cash on hand, and First Health Services will become a wholly owned subsidiary.
If the transaction closes July 31, 2009, for the five months of 2009 post acquisition, Magellan says it expects First Health Services to generate $60 million in revenues and segment profit of $7.5 million.
“The acquisition allows us to expand our capabilities into a new area, Medicaid pharmacy benefits administration, that is complementary to our existing businesses,” says René Lerer, MD, chairman and CEO of Magellan. “This constitutes an important step in furthering the company's diversification strategy.”
Lerer says Medicaid has historically given Magellan “significant growth opportunities” that now include behavioral health, radiology benefits management, and specialty pharmacy. “We intend to build on our current expertise and relationships in this area by adding the management of pharmacy costs to our current product portfolio through First Health Services,” Lerer says. “This will significantly enhance our opportunities and provide another platform for continued growth in this market segment.”
Medicaid spending is increasing faster than any other major category in state budgets due primarily to increasing enrollment and use of services, even as most states face severe recession-related budget constraints. Pharmacy spending within Medicaid, with an annual growth rate of 5% to 7%, is a particular concern for both state and managed Medicaid payers. As a result, Lerer says, state Medicaid programs and Medicaid MCOs are looking for “more comprehensive management techniques to address increasing pharmacy costs.”
Magellan’s three-year agreements with Coventry to manage radiology services on a risk basis and provide the company’s new oncology management services are contingent upon the acquisition of First Health Services.
Under the radiology agreement, Magellan will manage diagnostic imaging services, including cardiac diagnostic testing, in five Coventry markets, with a planned full implementation by early 2010. Annual revenue upon full implementation is expected to be $150 million.
The oncology service agreement is expected to be implemented in five Coventry markets by the end of this year. Magellan's oncology management program addresses the selection, cost and quality of pharmaceutical agents used to treat cancer, provides clinical care management services, and audits administrative processes, such as the accuracy of claims payments.