By Liz Hoffman, Dana Mattioli and Anna Wilde Mathews
Aetna Inc. is nearing a $34 billion deal to buy Humana Inc.
following weeks of frenzied merger talks among the largest health
insurers.
People familiar with the deal said it could be inked before the
weekend.
Aetna is expected to pay about $230 a share for Humana, one of
the people said. This price would represent a premium of 23% from
July 2's close, and 29% from the company's share price before The
Wall Street Journal in late May first reported Humana was exploring
a sale.
A takeover approach for Humana earlier this year thrust the
biggest health-insurance companies into a five-way merger frenzy.
Cigna Corp. and Aetna were vying to buy Humana, while fielding
takeover approaches of their own. Cigna and Anthem Inc. have
rekindled talks after Cigna earlier rejected a public $184-a-share
takeover bid from Anthem, its larger rival, and UnitedHealth Group
Inc. earlier approached Aetna.
Meantime, smaller, Medicaid-focused Centene Corp. on July 2 said
it agreed to buy Health Net Inc., in a deal worth about $6.3
billion.
The consolidation momentum in the health-insurance industry is
being fed by a desire to diversify and cut costs, amid a landscape
changed by the Affordable Care Act. Insurers are eager to reduce
expenses and build scale that will help them face off against
health-care providers that are bulking up. The providers themselves
are growing partly with an eye toward new forms of payment
encouraged by the health law.
A deal to buy Humana would vault Hartford, Conn.-based Aetna
toward the top of the burgeoning Medicare business and give it
scale to thrive as the industry consolidates.
But expected scrutiny from antitrust regulators, along with
signs of some emerging operational challenges at Humana, will put
pressure on Aetna and its chief executive, Mark Bertolini, to
demonstrate that the huge bet will pay off.
In picking up Humana, Aetna would get a powerful asset--a
company with a rapidly growing Medicare enrollment that totals 3.2
million, which, combined with Aetna's Medicare membership of 1.26
million, would likely put the merged company close to current
industry leader UnitedHealth Group. The Medicare business is seen
as a growth engine for the industry, as baby boomers age into
eligibility and choose the private-insurer version of the
government program, known as Medicare Advantage plans.
Humana performs strongly in a key measure of Medicare quality
known as star ratings, which are tied to government payments. The
Louisville, Ky., insurer has been moving rapidly to forge close
ties with doctors and other providers in efforts to boost
performance and rein in costs. Humana is also a leading provider of
Medicare drug benefits, known as Part D plans, with 18% of that
market, according to a tally by Wells Fargo Securities.
A deal would be particularly high-stakes for the federal
government because of Humana's key role in Medicare and its
significant footprint in the health law's insurance exchanges.
A Wall Street Journal analysis found that an Aetna-Humana tie-up
would increase by about 180 the number of U.S. counties where at
least 75% of customers for Medicare Advantage plans are in the
hands of a single insurer. In eight states, an Aetna-Humana merger
would remove a competitor from the exchanges where individuals can
buy coverage under the Affordable Care Act, though insurers may not
offer plans in every region of a state.
Goldman Sachs health-insurance analysts, looking at potential
market-concentration issues, estimated that around 13% of the
combined Aetna-Humana's Medicare Advantage enrollment could be at
risk of divestiture if the two companies sought to merge. The
analysts estimated the figure at around 18% of the combined
individual-insurance business and 16% of small-group plan
enrollment, though some states were excluded from those
tallies.
In recent months, Humana has shown signs of operational
snags.
Humana has missed analysts' earnings projections for the last
three quarters. It has warned of a possible uptick in hospital
utilization among its Medicare members, and it has disclosed a
Justice Department probe into how Medicare Advantage insurers score
the health risks of their members, which impacts their
payments.
Humana has also struggled with its business on the health law's
marketplaces. Recently, when the Obama administration released
calculations of health-insurer payments for 2014 under Affordable
Care Act programs designed to help insurers that enrolled a lot of
sicker, costlier consumers, Humana's allotment appeared to come in
significantly short of its projections. The amounts made public so
far aren't complete yet, however.
A deal would be a capstone for Mr. Bertolini, as it likely
ensures that Aetna will endure in an industry that many experts
think could shrink soon to just three major players at the top.
Aetna's revenue last year totaled $58 billion, while Humana's was
$48.5 billion. The current No. 2 insurer by revenue, Anthem, had
$73.9 billion, while UnitedHealth Group's was $130.5 billion,
including its health-services arm, Optum.
A tie-up would turn eyes toward Cigna, which would end up
considerably smaller than its peers with revenue of $34.9 billion
and business largely focused on self-insured employers, along with
a significant overseas presence.
During the last major round of insurance-industry deal-making,
Mr. Bertolini picked up Coventry Health Care Inc., closing that
acquisition in 2013. That left Aetna with a bigger
individual-insurance business, as well as increased Medicare and
Medicaid, but it didn't reshape Aetna the way the Humana
acquisition would, tipping a company long known for its employer
business far deeper into the government space.
A deal would also mark the end of Humana as a standalone
company, where it has long been a prominent name in the health
industry and a key presence in its hometown, Louisville. Humana was
once a major health-care provider, but it spun off its hospital
unit in 1993. Longtime former Humana CEO Michael B. McCallister,
who took over the company when it was struggling in 2000, is
credited with steering it deeply and successfully into the Medicare
business, which has remained at the center of the company.
Write to Liz Hoffman at liz.hoffman@wsj.com, Dana Mattioli at
dana.mattioli@wsj.com and Anna Wilde Mathews at
anna.mathews@wsj.com
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