By Liz Hoffman, Dana Mattioli and Anna Wilde Mathews
Aetna Inc. is nearing a deal to buy Humana Inc., according to
people familiar with the matter, in a tie-up of health insurers
that could be announced this week.
The people said a deal could be inked as soon as Thursday night,
though they cautioned the timing could slip.
Aetna is expected to pay about $230 a share for Humana, one of
the people said. This price would value the Louisville, Ky.,
insurer at about $34 billion. Humana's market value was $28.9
billion as of the market close Thursday.
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 trying to
rebuff takeover approaches of their own. Cigna has been in talks
with Anthem Inc., and UnitedHealth Group Inc. earlier approached
Aetna.
A deal to buy Humana would vault 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 big bet will pay off.
A price of $230 per share for Humana would represent a premium
of 23% from Thursday'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.
In picking up Humana, Aetna would get a unique asset--a company
with a rapidly growing Medicare enrollment that totals 3.2 million.
This, combined with Aetna's Medicare membership of 1.26 million,
would likely put the merged company close to current industry
leader UnitedHealth.
The Medicare business is considered 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
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 have 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 in which 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 Medicare Advantage enrollment of a combined Aetna-Humana
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 affects their
payments.
Humana has also struggled with its business on the health law's
marketplaces. Recently, 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 with a 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 stand-alone
company. It has long been a prominent name in the health industry
and a major 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 and Dana Mattioli at
dana.mattioli@wsj.com
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