Seizing on the massive expansion in Medicaid, Blue Shield of California has agreed to acquire Care1st, a Monterey Park-based health plan with more than 500,000 patients.
Until now, insurance giant Blue Shield hasn't participated in Medi-Cal, the state's Medicaid program for low-income people. As a result, it has missed out on the program's growth to 11.3 million Californians as part of the federal health law expansion.
Major insurers across the country such as Anthem Inc. and Aetna Inc. have made similar deals to grab more of the Medicaid expansion. Anthem, formerly WellPoint Inc., acquired Medicaid insurer Amerigroup for $4.9 billion in 2012.
The Care1st deal, if approved by regulators, would give the San Francisco nonprofit a total of 473,000 people in Medicaid managed-care plans as well as 46,000 Medicare patients. The large majority of Care1st members are in Los Angeles and San Diego counties, but it also has patients in Arizona and Texas.
Blue Shield Chief Executive Paul Markovich said his company has been looking for a way to break into Medicaid for some time and Care1st was an ideal fit.
"One in three Californians are getting their health insurance through Medicaid," Markovich said in an interview. "It's really a big gap to not be in that line of business at all."
Neither company disclosed the acquisition price or other terms of the deal. Blue Shield said it is drawing on some of its $4 billion in reserves for the all-cash transaction.
Blue Shield is playing catch-up in this fast-growing segment of government healthcare.
At latest count, 27 states, including California, have chosen to expand their Medicaid rolls as part of President Obama's Affordable Care Act. Other states have resisted, citing opposition to the health law and budget concerns.
More than 2 million Californians have joined Medi-Cal since January.
These growth opportunities under the federal overhaul have boosted insurance company results and lifted their shares on Wall Street.
Shares of Woodland Hills insurer Health Net Inc., a big Medicaid player, are up 70% year to date, compared with an 11% increase for the Standard & Poor's 500 stock index for the same period.
To help control costs, states are turning to private insurers to shift more Medicaid patients out of conventional fee-for-service medicine and into tightly managed HMO plans. Now that approach is being extended nationally to so-called dual eligibles, patients who receive both Medicaid and Medicare benefits.
Those patients often have multiple chronic conditions, and they can be among the costliest patients to care for in either government program. Care1st has 5,300 dual-eligible patients, and that number could grow under a California pilot program.
Care1st was founded in 1994 by a group of medical providers and hospitals. The company said the four major shareholders are Pacific Alliance Medical Center in downtown Los Angeles and three medical groups — Cal Care, Crown City and LAMC.
In Los Angeles, Care1st serves Medi-Cal patients as a subcontractor to L.A. Care Health Plan.
Howard Kahn, chief executive of L.A. Care, said the timing was right for Care1st owners to cash out amid the heightened interest in Medicaid.
"It got to the point in their development where Care1st goes big or you get out," Kahn said. "We have had a good working relationship with Care1st since its inception."
Kahn said he's not ready yet to sign off on the Blue Shield deal. L.A. Care has the right to approve any transfer of ownership involving its Medi-Cal members.
"We are not for or against the deal yet," he said. "We will have to review this over the next few months to make sure the interests of our membership and interests of L.A. Care and the community are protected."
The deal is also subject to numerous regulatory approvals, and it's expected to close in the third quarter of 2015.
Blue Shield has already played a big role in the expansion of private insurance under Obamacare. The company signed up nearly 400,000 people in the Covered California exchange during the first open enrollment, second only to Anthem.
Overall, Blue Shield has 3.4 million members in the state and $10.8 billion in annual revenue.
With Care1st, Blue Shield will be inheriting a health plan that has received low marks at times from patients.
In a national ranking of Medicaid health plans, Care1st's L.A. County plan ranked 107th out of 136 plans rated by the National Committee for Quality Assurance, a major accreditation organization in Washington. Care1st's San Diego HMO was ranked No. 102.
In both regions, Care1st received a 1 out of 5, the lowest score possible, on consumer satisfaction.
Among 10 Medicaid plans rated in California, Care1st's L.A. County plan ranked sixth and its San Diego County plan was fourth.
In a separate matter, California regulators fined Care1st $120,000 last year related to its use of an overseas contractor.
The California Department of Managed Health Care said the company failed to disclose that it had outsourced much of its claims processing to a firm in China. According to the state, the health plan said the error was unintentional and it stopped using the Chinese firm.
On Monday, Care1st's chief executive, Anna Tran, said she was proud of the company's track record at serving the most vulnerable patients.
"As a smaller company, however, our resources are limited," Tran said in a statement. "This commitment from Blue Shield will allow us to continue our mission in partnership with them."
Blue Shield said it could continue to operate the businesses in Arizona and Texas, but under the Care1st name. Arizona is the larger of the two with 106,000 Medicaid patients.