Aetna will pay $37 billion cash and stock to acquire Humana, the companies announced on July 3, in what will be the biggest health insurance merger to ever hit the industry.
“The acquisition of Humana aligns two great companies,” said Aetna chairman and CEO Mark Bertolini. “The complementary combination brings together Humana’s growing Medicare Advantage business with Aetna’s diversified portfolio and commercial capabilities to create a company serving the most seniors in the Medicare Advantage program and the second-largest managed care company in the United States.”
With Humana valued at $37 billion, or $230 per share, the deal is the fourth-largest consolidation in the American economy this year, ranking behind HJ Heinz’s $44 billion takeover of Kraft Foods and the pending $79 billion Charter-Time Warner deal. The acquisition is the largest consolidation in the global insurance industry, exceeding Swiss property and casualty giant ACE’s proposed $28 billion takeover of the Chubb Group and the $16.5 billion Anthem-WellPoint merger in 2004. Aetna said it will cover the costs through a combination of cash and stock, based on the company’s closing stock price of $125 on July 2.
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The deal is part of an expected wave of consolidation in managed care and health insurance. Anthem may chase an acquisition of Cigna after its earlier $50 billion bid was rejected. Meanwhile, Centene, a growing St. Louis-based Medicaid managed care company, is going ahead with a $6.8 billion acquisition of Health Net.
Aetna told investors that the deal should yield $1.25 billion in 2018, along with higher operating earnings in 2017.
For health systems, the insurance industry consolidation brings cost containment and competitive pressures but it also creates opportunities for collaboration. A large part of Aetna’s accountable care strategy has involved new health plan networks designed and co-branded with health systems like Banner Health and Catholic Health Initiatives. Aetna is also helping some hospital systems launch their own health plans for their workforce and for regional employers.
If the deal is approved as a whole by regulators, Humana will bring Aetna’s membership to more than 33 million. Humana will add 3 million seniors on Medicare Advantage, as well as 4.3 million Medicare Part D drug plan customers, 1.1 million individual members (including some high-cost Affordable Care Act exchange populations in markets like Georgia), 1.8 million members in employer-sponsored plans, and more than 3 million military plan members.
The companies also said Humana will boost Aetna’s pharmacy business. Humana owns or jointly owns 2,700 primary care providers, mostly in Florida, and employs 6,000 clinical management professionals. Humana has also contracted with thousands more primary care providers and started pilots with primary care startups like Iora Health.
“Through the use of technology and integrated services to simplify the consumer experience, the combined entity will be even more effective in meeting the health needs of many more people,” said Bruce Broussard, the president and CEO of Humana. “The transaction is a testament to the accomplishments of Humana associates and an outstanding outcome for our shareholders, who will receive an immediate premium and the opportunity to participate in the growth potential of the combined organization.”
From nursing homes to insurance
Humana was founded as Heritage House of America in 1961 by Louisville attorneys Wendell Cherry and David A. Jones, and it soon became the nation’s largest nursing home operator.
In 1968, with the new Medicare program paying healthcare costs for millions of seniors, the company dove into the hospital industry and completed an initial public offering. Renamed as Humana in 1974, with the nursing homes auctioned off, the company acquired and built hundreds of hospitals across the South, becoming the largest hospital operator during the 1980s, when health management organizations took over American healthcare.
Humana nurtured its own version of what today might be called value-based provider networks, and in 1984 launched its own health plan. Humana’s insurance business lost money during the late 1980s, but bounced back amid the financial troubles with hospitals. By the early 1990s, it was often more profitable to manage healthcare than to provide it. In 1993 Humana spun off its hospital business into Galen Health Care (later bought by Columbia Hospital Corp. and now part of the Hospital Corp. of America), and focused on managing health benefits, particularly government-funded health plans in the military and later Medicare.
While co-founder Cherry died of lung cancer at age 55 in 1991, it was Jones who led Humana for over three decades, trying to redirect the company along with the changes in the American healthcare economy. Jones retired in 1997, ceding leadership to Gregory Wolf; a year later United Healthcare tried to take over the company for $5.5 billion. Michael McCallister led the company from 1999 to 2012, overseeing the growth in Medicare Advantage and Part D drug plans and such strategies as co-branding drug plans with Walmart.
Handing the company off to Aetna is Bruce Broussard, who became Humana CEO after leading McKesson’s specialty and U.S. oncology company. Bertolini will be CEO of the combined company, and it’s not clear if Broussard or other Humana executives will stay past the transition. Aetna said the acquisition is expected to close by the summer of 2016, and that Louisville will remain a division headquarters for Medicare, Medicaid and TRICARE.
Humana has seen its share of challenges recently, including a pending investigation and whistleblower suit by physicians who say they were asked to inflate risk adjustment information on Medicare beneficiaries. But the high-value deal with Aetna suggests those wouldn't present severe financial liabilities -- unlike the uncertainty over the Blues “cartel” lawsuit that Cigna cited in rejecting Anthem’s offer.
In other areas of health insurance, an anticipated consolidation in the Medicaid HMO space is also emerging. St. Louis-based Centene is set to acquire Woodland Hills, California-based Health Net for $6.8 billion, including $500 million in debt. The price represents a 21 percent premium on Health Net’s closing price on Wednesday, July 2. Health Net will give Centene, the country’s largest Medicaid HMO chain, a foothold in California’s Medicaid program and Medicare-Medicaid dual eligibles program.