Aetna to Buy Humana in Industry-Altering Deal

7/3/2015

Following last week’s landmark Supreme Court ruling on the Affordable Care Act (ACA), or Obamacare, two leading health insurers will be combining to form the second largest company in the industry. Aetna, the third-largest insurer will acquire Humana, the country’s fourth largest health plan provider. Aetna will pay a cash and stock equivalent to just over $230 per share, with multiple sources citing the total cash and stock deal to be valued at $37 billion, although the Wall Street Journal lists that total at $34.1 billion. The new company will earn an estimated $115 billion per year and service roughly 33 million customers. Aetna CEO, Mark Bertolini said, “This combination will allow us to continue to invest in excellent service for our members and strengthen our partnerships with providers to deliver high quality care at an affordable price.” The company will expand its number of board members from 12 to 16, adding four Humana members. Bertolini is expected to assume the CEO position for the combined company.

The announcement of the deal comes after weeks of speculation in musical chairs-style fashion among the top five providers. Last month Anthem, the second largest provider, announced its desire to buy Cigna, the fifth-leading provider, in a $47.5 billion deal. Industry leader, United HealthGroup, and Aetna have also discussed a possible merger, while Cigna itself has been expressing its desire to purchase Humana as well. Many have suspected the merger talks are occurring now in order to finalize any possible deals ahead of the ACA’s November open enrollment period. The wave also comes as over 100 hospitals, some small health insurance providers, as well as drug makers have either merged or are in discussions to merge, with nearly all of them citing similar flexibility and thinning margin-related reasons. Many doctors, however, fear that health insurance consolidation puts too much power into the hands of only a few companies, claiming that they will have the power to limit the choice of doctors in a network and with little safeguards against raising premiums indiscriminately. At the same time, insurance lobbyists have cited that there is little evidence that mergers negatively affect insurance costs. Aetna expects the deal to save around $1.25 billion per year though the deal by 2018.

The passage and reaffirmation of the ACA has precipitated much of the merger and acquisition fervor. The law has led to many more potential consumers; however, as more individuals are joining the health care marketplace, it requires the providers to be more flexible in the types of coverage they provide while the need to keep premiums low has led to thinner profit margins, albeit on a grander scale. At the same time, the opportunity to gain lucrative federal subsidies has greatly improved. Humana CEO, Bruce Broussard acknowledged the supreme importance of the ACA to the industry, saying “The public exchange is an example of where the system is going over all.” Combined, the company would receive over half of its revenue through Medicare and Medicaid reimbursements, especially given Humana’s strong market presence in the private Medicare Advantage health plans, which account for 25 percent of all Medicare reimbursements. Humana receives roughly 73 percent of its revenue from government sources. Aetna, on the other hand, maintains a strong employer health plan market. The combination would set the company up for the type of flexibility industry executives are looking for.

Although the federal mandate under Obamacare has largely been responsible for the desire to consolidate the industry, analysts and company executives have expressed some anxiety over the government’s antitrust concerns. The deal would give the company about a million more Medicare Advantage customers than United HealthGroup, however, it would still earn roughly 12 percent less in total revenue than the market leader. Both CEOs believe that the deal will meet regulatory approval because much of the companies’ services complement each other although there is some overlap, especially in Florida. If regulators reject the deal, Aetna will owe Humana a $1 billion fee. Even though the deal looks quite plausible on its surface, other large-scale mergers have been recently rebuffed by regulators. Last week, the Justice Department filed a lawsuit to block General Electric’s potential $3.3 billion sale of its home appliances division to Swedish company, Electrolux. This follows leading foodservice supplier, SYSCO, walking away from its purchase of industry number-two, U.S. Foods, after a federal judge issued a temporary injunction on the deal. Another lawsuit in federal court is pending, accusing Blue Cross/Blue Shield of antitrust violations, calling the brand a “cartel.” Bertolini is confident that the deal will be approved however; saying that the review process is, “never totally predictable, but we believe it’s very manageable.”

Sources:

CNN Money – Sophia Yan

New York Times – Chad Bray and Reed Abelson

Wall Street Journal – Anna Wilde Mathews, Liz Hoffman, and Dana Mattioli