The Exchange

Aetna’s Bet: Government Health Care Isn’t Going Anywhere

Add Aetna (AET) to the list of insurers that don't expect government-backed health care to be whittled down anytime soon.

While President Obama's health legislation and vice presidential candidate Paul Ryan's views on taxpayer-funded medical insurance certainly are hot-button political issues, on the business side, insurance companies are worried about adapting to the operational realities ahead.

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Photo credit AP. Doctor with a patient.
It's getting much easier to see which way they're expecting this to play out in the years to come. Aetna, of Hartford, Conn., said Monday it will buy Bethesda, Md.-based Coventry Health (CVH), making it the latest insurer to increase its reach into Medicare and Medicaid programs. The Coventry deal, for a price approaching $6 billion, or $7.3 billion including debt, will make Aetna's revenue more reliant on the government.

After it closes the acquisition, which is expected in the middle of next year, government business will account for more than 30% of its revenue, up from 23% today, Aetna said.

More M&A

The insurance industry has seen similar moves in the recent past. Before the Aetna bid for Coventry, WellPoint (WLP) set plans to buy Amerigroup (AGP), and Cigna (CI) moved for HealthSpring, both deals that will give the purchasers more access to government programs. In this particular case, JPMorgan analyst Justin Lake, in a research report referenced by Barron's, said Aetna's takeover of Coventry isn't a "game changer in terms of government focused capabilities" to the extent the above-mentioned deals are.

However, it does clearly represent another big bet from the industry that government programs will continue to exist in substantial size, and that they will need servicing. With the acquisition, Aetna expects to add nearly 4 million customers and 1.5 million Medicare Part D members, for prescription drugs, to its rolls. As of June 30, Coventry had 253,000 accounts in its Medicare Advantage Coordinated Care Plans. Its Medicare Part D membership totaled nearly 1.5 million, and Medicaid covered 932,000 members.

As of Dec. 31, Aetna had around 1.8 million Medicare, Medicare supplement and Medicaid medical clients, along with 652,000 Medicare and Medicaid dental plan enrollees. All told, the company had about 18 million medical insurance members, 13.6 million on the dental side and 8.7 million pharmacy-benefit members at the end of June, its website says.

Look at the data from the Centers for Medicare & Medicaid Services, and you can see why private insurers are angling to stake their claims. For 2011, estimates indicate there were 48.6 million hospital insurance -- Part A -- and/or supplementary medical insurance Part B Medicare enrollees in the U.S., up from 39.6 million in 2000 (see footnote 1).

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Photo credit AP. Supporters of President Obama's health legislation.
Additionally, in 2009 national health spending, including individual health care, administrative costs, facilities construction and other components, was $2.49 trillion. In 2000, the number was $1.38 trillion (footnote 2). Focusing on only the personal health care payments section, the total was $2.09 trillion in 2009, up from $1.16 trillion in 2000.  Medicare and Medicaid accounted for a combined 39% of that spending, whereas private health insurance was 34.1% (footnote 3).

How This Deal Compares

For this particular acquisition, the combined revenue of the two companies would still be smaller than Unitedhealth Group (UNH) and WellPoint, but would surpass Humana (HUM). According to FactSet figures, adding Coventry's revenue of $13.4 billion over the last 12 months to Aetna's $34.8 billion in that time frame would create an insurer with a top line of roughly $48 billion.

To acquire Coventry, Aetna will pay $42.08 a share in cash and stock. The last time Coventry saw that level was mid-2008. In the past 52 weeks, the shares have traded between $25.78 and $36.04, and they closed Friday at $34.94, meaning the offer price represents a 20% premium.

Still, the price is well below Coventry's best-ever level. FactSet data show that Coventry's all-time high was $62.36 in September 2007. So despite the takeover price, the bid is 32% below the stock's peak of five years ago.

Now, we wait for the next possible deal, and along with it, further confirmation that the health insurers are planning on more and more government outlays to boost their results.


1. 2011 Edition, Populations: Table IV.1 Medicare Enrollees Selected Years
2. 2011 Edition, Expenditures: Table II.10 National Health Expenditures Source of Funds
3. 2011 Edition, Expenditures: Table II.11 Personal Health Care Payment Source

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