Aetna's plans announced Monday to acquire Coventry Health Care Inc. for $5.6 billion could catapult the insurance giant to the front of an industry race to capitalize on Obamacare and the health needs of aging Baby Boomers.
The deal, subject to approval by Coventry stockholders and industry regulators, is expected to be completed in mid-2013.
Aetna said it will pay about $5.6 billion to acquire Coventry, of Bethesda, Md., and will take on the company's debt, driving up the total value of the transaction to $7.3 billion.
Medicare enrollment will swell in the next two decades as more and more Baby Boomers reach the eligibility age of 65. Medicaid, too, is set for massive growth. In 2014, federal health care reform under the Affordable Care Act — often called Obamacare — will expand the market for insurance companies to administer government-funded Medicaid plans for the poor and disabled.
Additionally, federal reform is squeezing insurers' profits, which has driven managed care companies like Aetna to expand by buying out competitors, said David H. Windley, an analyst at Jefferies & Co. in Nashville.
"A lot of this is driven by regulatory compliance under the Affordable Care Act," Windley said. "There are limits on profitability through underwriting; the growth comes through acquisitions."
In Coventry, Aetna would get a company that has a reputation for being well-run with a strong management team. The deal would increase its business in government programs and enable Aetna to better compete with WellPoint and UnitedHealth in the decade ahead, analysts said.
In a statement announcing Aetna's plans, Chairman and CEO Mark T. Bertolini said: "Integrating Coventry into Aetna will complement our strategy to expand our core insurance business, increase our presence in the fast-growing government sector and expand our relationships with providers in local geographies.
"Coventry has distinct capabilities and a local market focus that will accelerate our efforts to bring simpler, more affordable products to consumer insurance exchanges in 2014 and beyond," Bertolini said.
Trimming $400 Million
Health insurers' profits are squeezed as never before. Starting last year, under federal regulations, Aetna, Cigna and all health insurers must spend a minimum amount of revenue on medical expenses for customers — 85 cents of every premium dollar for people in large-group plans and 80 cents of each premium dollar in small-group and individual-market health plans.
In the past, a health insurer's shareholders benefited when the insurer spent the least amount of every premium dollar on medical expenses. With federal constraints on profit, insurers are looking for better profits by serving more members through acquisitions and then reducing administrative costs, including jobs.
With the purchase of Coventry, Aetna expects to eliminate $400 million annually from expenses by 2015.
"These cost efficiencies will support our efforts to drive costs out of the system and offer products at a lower price point in the marketplace," said Aetna's chief financial officer, Joseph M. Zubretsky.
Windley, the Jefferies & Co. analyst, said the acquisitions allow for the cutting of corporate overhead even as new members are added.
"A good chunk of that comes from employment," Windley said. "Not much on the Aetna side; most on the Coventry side."
How exactly the cost-cutting might affect jobs in Connecticut and elsewhere remains unclear.
"While we are constantly focused on managing our staff levels to align with membership, we do not anticipate any immediate impact as a result of this pending acquisition," said Aetna spokeswoman Cynthia Michener. "Until the acquisition closes, Aetna and Coventry will continue to operate as two separate companies. After that, we will begin a staged integration process that will involve employees of both companies. We expect to address any overlap in similar functions over time."