Aetna offering $35B for rival

Humana buy aids Medicare growth

Aetna aims to spend about $35 billion to buy rival Humana and become the latest health insurer bulking up on government business as the industry adjusts to the 2010 federal health care overhaul.

The proposed cash-and-stock deal, announced early Friday, would make Aetna a sizable player in the rapidly growing Medicare Advantage business, which offers privately run versions of the federally funded health care program for the elderly and some people with disabilities.

The combination also would bolster Aetna's presence in the Medicaid program, which is funded by the states and the federal government, and Tricare coverage for military personnel and their families.

Health insurers are eager to do more business with government payers, partly because of a Medicaid expansion fostered by the health care overhaul and Medicare Advantage's surging enrollment. The Patient Protection and Affordable Care Act is expanding Medicaid coverage in several states to help provide health coverage for the uninsured.

"Government markets are the most rapidly growing aspect of the system," said Dan Mendelson, chief executive officer of the market research firm Avalere Health.

Total enrollment in Medicare Advantage plans has tripled over the past decade to about 16.8 million people and is likely to keep growing as more baby boomers become eligible for the plans.

Medicare membership is projected to rise to 68.4 million in 2023, up 26 percent from this year, according to the Centers for Medicare and Medicaid Services. About a third of those people are now enrolled in Medicare Advantage. Jeff Goldsmith, the president of consultant Health Futures, said that half of the elderly may eventually buy private plans.

Aetna's acquisition of Humana would make it the largest provider of Medicare Advantage coverage, with 4.4 million members, a figure that could change depending on regulatory review.

"The future of health insurance in the U.S. is enrolling publicly funded people," Goldsmithsaid. "Doubling down on Medicare Advantage is a really good bet."

Founded in 1964, Humana provides health insurance to about 9.8 million people and their families and received about 73 percent of its premiums in 2014 from federal government programs, namely Medicare. The company posted revenue of $48.5 billion in 2014 and had about 57,000 employees.

Aetna provides health insurance to about 23.7 million people and their families and posted revenue of $58 billion in 2014.

The acquisition "will significantly advance our strategy of more effectively serving members in a rapidly changing health care industry," Mark Bertolini, Aetna's chairman and chief executive, said in a news release.

Bertolini would assume the same roles in the combined company. The company's board would be expanded to 16 members and include four Humana directors.

Hartford, Conn.-based Aetna announced its deal a day after the Medicaid coverage provider Centene Corp. said it would spend $6.3 billion to buy fellow insurer Health Net. That deal would help Centene expand in the nation's biggest Medicaid market, California, and give it a Medicare presence in several western states.

In addition to those deals, the Blue Cross-Blue Shield carrier Anthem went public late last month with an offer of more than $47 billion for another insurer, Cigna.

Health insurers see more advantages to these big combinations than a chance to build their government portfolios.

Major acquisitions can offer an infusion of new business at time when growth has slowed in the biggest part of their business: employer-sponsored health coverage. Plus, more employers are opting to pay their own insurance claims and hire insurers to administer the coverage. That's a less lucrative line of work for managed-care companies.

Big deals also allow companies to quickly diversify their products and cover more territory. They also can yield savings when the companies combine back-office functions and cut overlapping jobs.

Both Aetna and Anthem also have cited the potential to improve their technology as a major reason behind their deals. Insurers are working to develop more apps and other tools that customers can use to shop for health care, since plans are exposing customers to bigger medical bills through high deductibles and other insurance expenses.

Insurers also are using technology more to help monitor and improve patient care. The health care overhaul is accelerating a push in the industry to reimburse doctors and hospitals more based on the quality of care they provide instead of just shelling out a certain amount for each procedure performed.

"Anytime an industry is changing ... it requires investments to sort of successfully make that change," said Shawn Guertin, Aetna's chief financial officer.

The effect these big acquisitions have on consumers can be murky and likely won't be felt for at least a year because insurers have already finalized most of their plans for coverage that starts in January. A combination may lead to fewer choices and some price changes for consumers, depending on where they live and who already is in their market.

Aetna's purchase price for Louisville, Ky.-based Humana includes a combination of $125 in cash and $105.11 in Aetna shares for each Humana share. The total of about $230 per share, which is based on the closing price of Aetna's stock Thursday, represents a premium of 29 percent to Humana's trading price in late May, before The Wall Street Journal reported that it was an acquisition target.

After the transaction, Aetna shareholders would own about 74 percent of the combined company, while Humana shareholders would own the remaining 26 percent.

The deal's total value amounts to about $37 billion, counting debt.

The combined company would cover more than 33 million people. Only UnitedHealth Group Inc. and the Blue Cross-Blue Shield carrier Anthem Inc. cover more. A combined Aetna-Humana is estimated to take in about $115 billion in annual revenue, creating the No. 2 U.S. health insurer by sales, after UnitedHealth Group.

Aetna said that while it will maintain its headquarters in Hartford, Conn., government programs, including Medicare, Medicaid and coverage sold to military members, will be based in Louisville.

The transaction is subject to shareholder and regulatory approval. The companies expect the deal to close in the second half of next year.

Shares of Aetna and Humana closed at $125.51 and $187.50, respectively Thursday. Markets were closed Friday for the July Fourth holiday.

The shares of both companies, like several other insurers, have soared to all-time-high prices this year.

Information for this article was contributed by Tom Murphy of The Associated Press; by Phil Serafino, Ed Hammond, Zachary Tracer and Ryan Sachetta of Bloomberg News; and by Chad Bray and Reed Abelson of The New York Times.

A Section on 07/04/2015

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