Monday, August 20, 2012

Aetna plans purchase of insurer Coventry for $5.7B - Pittsburgh Post Gazette

In a $5.7 billion bid that will remake the U.S. and Pennsylvania health care marketplaces, health insurer Aetna Inc. has announced plans to buy fellow insurer Coventry Health Care.

If the cash-and-stock acquisition goes through, Connecticut-based Aetna -- the third-largest insurer by enrollment and the fifth-largest U.S. health insurer by revenue, with $27 billion in direct premiums in 2011 -- will have acquired the nation's 10th-largest health and accident insurer by revenue, with $11.1 billion in direct premiums.

Combined, the two companies would control about 5.4 percent of the U.S. market, and would have had about $38 billion in direct premiums last year, putting them fourth on the list behind UnitedHealth, Wellpoint Inc. and the Kaiser Group, leapfrogging over Humana.

Nationally, Aetna's proposed acquisition of Coventry will bolster Aetna's Medicaid enrollment numbers months before millions of uninsured Americans are expected to become eligible for Medicaid coverage through President Barack Obama's health care overhaul.

The deal also ramps up Aetna Inc.'s Medicare Advantage and Medicare prescription drug businesses, as interest in these plans grows while the baby boomer generation ages and becomes eligible. Medicare Advantage plans are privately run versions of the government's Medicare coverage for the elderly.

PG graphic: Pa. insurance industry market shares
(Click image for larger version)

Locally, the move could create a formidable "new" opponent for Highmark Inc., Pittsburgh's and Pennsylvania's largest commercial health insurer, while reducing the number of competitors in the Pittsburgh region by one.

"This acquisition suggests that Aetna is finally taking the Western Pennsylvania market seriously," said Dave Straight, founder and CEO of the Marshall-based Benefits Network, who has worked for both Aetna and HealthAmerica, a Pennsylvania-based unit of Coventry.

"In addition to securing a sizable book of group business, I suspect that the HealthAmerica provider contracts will greatly improve Aetna's cost structure and as a result make them much more competitive. ... A successful integration could put Aetna on the map in the Pittsburgh region in a big way."

The deal would also further remove HealthAmerica from its historic Pennsylvania ties, he noted.

Coventry bought HealthAmerica in 1988; at the time, HealthAmerica, then based in Tennessee, operated the Pittsburgh-based unit, Penn Group. Penn Group, under HealthAmerica and then Coventry, had the largest HMO enrollment in Western Pennsylvania in the 1980s and early 1990s, before the Blues got into the HMO game.

Penn Group was created in 1975 by local unions and the University of Pittsburgh; it was acquired by HealthAmerica in 1981, then was jointly run by Coventry and Montefiore Hospital, now part of the UPMC network.

Later in the 1990s, HealthAmerica introduced the first PPOs -- preferred provider networks -- to the local marketplace. "They put managed care on the map here, and drove many innovations that Highmark was forced to follow," Mr. Straight said on Monday.

Eventually, Penn Group became HealthAmerica Pennsylvania.

Highmark, which still dominates the Pittsburgh market but has seen increased competition following UPMC's decision to allow other insurers wider access to its hospital network, said while it would be "premature to comment on the potential impact of the proposed consolidation on the local and regional health care marketplace, Highmark continues to welcome competition among health insurance companies."

UPMC, which owns 19 hospitals and employs more than 3,200 physicians, said of the purchase: "This is a positive for the competitive marketplace in Pittsburgh."

Pittsburgh-based Highmark is the eighth-largest health insurer in the U.S. by premiums -- it would move up to seventh if Aetna and Coventry become the same company -- and Philadelphia's Independence Blue Cross is, as of 2011, the 12th largest.

In Pennsylvania, they are the top two health insurers, with UPMC Health Plan in the third spot, Aetna at No. 4 and Coventry No. 7. If Aetna and Coventry combine, they will move past UPMC Health Plan into the third spot in terms of Pennsylvania revenue and market share.

Aetna said Monday it will pay $42.08 for each share of Coventry stock. That includes $27.30 in cash and a portion of its stock. The price represents a 20 percent premium on Coventry's Friday closing price of $34.94.

The $5.7 billion deal's value rises to $7.3 billion when counting debt from Coventry Health Care Inc., which is based in Bethesda, Md.

Medicaid and Medicare Advantage currently represent small slices of Aetna's enrollment, but it expects the Coventry deal to raise the revenue it draws from government business to 30 percent, from 23 percent. Coventry said last month that its Medicaid enrollment doubled to about 1.5 million people.

This move is the biggest in a run of acquisitions proposed by the nation's largest health carriers. Last month, WellPoint, which offers Blue Cross-Blue Shield plans in 14 states, said it would spend $4.46 billion to buy another insurer that specializes in Medicaid, Amerigroup Corp. Earlier this year, Cigna Corp. completed its purchase of HealthSpring for nearly $4 billion as it grabbed for a share of Medicare revenue.

Aetna said Monday the boards of both companies have approved the deal, but it is still subject to Coventry shareholder approval and regulatory review.

Aetna will pay for the acquisition with cash and about $2.5 billion in new debt and commercial paper. It expects the deal to modestly help earnings next year, not counting transaction costs. Aetna forecasts a gain of about 45 cents per share to its annual earnings in 2014 and 90 cents per share in 2015 from the deal.

Shares of Coventry climbed $7.10, or 20 percent, to $42.04 Monday in trading, while Aetna shares rose $2.14, or nearly 6 percent, to $40.18.

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