By Liz Hoffman, Dana Mattioli, Dana Cimilluca and Anna Wilde Mathews
Health insurer Humana Inc. is exploring a possible sale of the
company, a move that could trigger a round of mergers in an
industry grappling with challenges and opportunities the federal
health-care overhaul has created.
Faced with pressure to cut costs and find ways to profit from
the potential new customers the Affordable Care Act is generating,
the big health insurers have long been expected by analysts to turn
to mergers that will give them the heft to better compete as the
industry evolves.
Humana, based in Louisville, Ky., gets the bulk of its revenue
from its business administering the private version of the federal
Medicare program. The company is seen as a prize because of its
powerful Medicare franchise, which is growing rapidly as baby
boomers age into eligibility and opt for these plans, known as
Medicare Advantage.
Humana has received indications of takeover interest and is
working with advisers at Goldman Sachs Group Inc. on the possible
sale, according to people familiar with the matter. Aetna Inc. and
Cigna Corp. are among those that have held preliminary discussions
with Humana, some of the people said.
It is possible there will be no deal for the company, which had
a market value Friday afternoon of nearly $27 billion before The
Wall Street Journal reported news of the talks and the shares
surged 20% to close at $214.65, an all-time high.
Like those of other health insurers, Humana's shares had already
done well lately. They had risen 42% over the past year before the
latest news, with much of the surge tied to speculation about a
potential deal, as well as optimism about the Medicare business's
growth prospects.
"We view this step as a trigger event in a managed-care industry
overdue for consolidation," analysts at Leerink Partners LLC wrote
in a research note Friday afternoon. "We expect the next year will
see multiple strategic actions among the major players."
The industry is facing pressure to squeeze out costs, and
mergers could help. An ever-larger share of the companies' business
is tied to government programs and the health law's exchanges,
where individuals--who tend to be more cost-conscious--buy their
own plans. Getting bigger could also give insurers increased
leverage in negotiating rates with hospitals, many of which have
expanded through their own mergers.
Humana is one of the five biggest players in an industry that
bankers and analysts have long considered ripe for consolidation.
Besides Aetna and Cigna, the other major insurers are UnitedHealth
Group Inc., the largest by revenue, and Anthem Inc., while a roster
of smaller companies are also seen as likely to be swept up in
deals.
Investors broadly cheered the news, as shares of Humana's
closest rivals rose, too. Aetna shares rose 1.4% Friday, while
Cigna jumped 3.7%, UnitedHealth increased 0.5% and Anthem added
2.2%.
A takeover of Humana, should one ensue, could lead to more
health-insurance consolidation, which has been relatively quiet
since a spate of tie-ups announced in 2011 and 2012 that included
Aetna's $5.7 billion purchase of Coventry Health Care Inc. and
Cigna's $3.8 billion acquisition of HealthSpring Inc. The big deals
then were aimed at building scale in Medicare and Medicaid, which
is geared toward lower-income patients.
"While impossible to predict timing, there is a consistent theme
of consolidation being openly discussed by a number of management
teams in the sector," J.P. Morgan analysts wrote in a recent
research note.
Humana posted pretax income of about $1.1 billion on revenue of
$48.5 billion last year. In the first quarter, its membership rose
to 14.2 million customers and revenue jumped 18%, though its
earnings fell short of Wall Street expectations.
Humana has missed analysts' earnings projections for the past
three quarters. It has said it is facing challenges with its
business on the health law's exchanges, and warned of a potential
uptick in hospital usage by its Medicare members. It also has
disclosed a Justice Department probe into how Medicare Advantage
insurers score the health risks of their members.
But Humana's stock has been buoyed by the perceived value of its
Medicare franchise as well as by the speculation that it would be
involved in a deal.
Humana last year hired a former Goldman banker as its finance
chief, a move widely seen as a signal that the company was
interested in pursuing deals.
In March, the company agreed to sell its Concentra unit, which
provides urgent care and physical-therapy services, to a joint
venture of Select Medical Holdings Corp. and private-equity firm
Welsh Carson Anderson Stowe for about $1.1 billion.
After UnitedHealth, Humana is the second-biggest purveyor of
Medicare Advantage plans, with 3.19 million beneficiaries, or
approximately 18% of the total enrollment in the private plans,
according to a tally by Wells Fargo Securities.
Aetna has been viewed by some industry analysts as the most
likely acquirer of Humana, and executives at Aetna have spoken
publicly about their interest in acquisitions. Cigna and Anthem
also have been linked to Humana, though some industry experts
believe an Anthem tie-up could face regulatory challenges over
Humana's commercial business, which overlaps with Anthem's in
markets such as Kentucky.
A UnitedHealth deal has been seen as less likely because of the
potential size of their combined Medicare businesses, which could
draw antitrust pushback.
The impact of a Humana takeover could be keenly felt in
Louisville, where the insurer and former hospital operator has long
been a big employer. Its 26-story headquarters building, designed
by well-known architect Michael Graves, is a signature presence in
the city's center.
Corrections & Amplifications
An earlier version incorrectly reported Humana's 2014 revenue.
It should be $48.5 billion, not $34 billion.
Write to Liz Hoffman at liz.hoffman@wsj.com, Dana Mattioli at
dana.mattioli@wsj.com, Dana Cimilluca at dana.cimilluca@wsj.com and
Anna Wilde Mathews at anna.mathews@wsj.com
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