Aging Baby Boomers Make Health Insurer Humana a Target: Real M&A

As more former hippies need hip replacements, health insurers from Humana Inc. to WellCare Health Plans Inc. are turning into hot targets.

Humana and WellCare, both providers of Medicare coverage, are generating record revenue as aging U.S. baby boomers drive an increase in enrollment in the government-sponsored program for the elderly. Insurers are also benefiting from expanded Medicaid coverage for the poor under Obamacare.

Larger insurers such as Aetna Inc. and Anthem Inc. would like to continue expanding beyond coverage that’s paid for by employers, and could be interested buyers. A deal for either Humana, valued at $27 billion, or Medicaid provider Centene Corp., at $8.3 billion, would be the biggest acquisition of a U.S. managed-care provider in more than a decade. WellCare is smaller at $4.1 billion.

Some of the largest health insurers “don’t have adequate Medicare and Medicaid exposure,” Ana Gupte, an analyst at Leerink Partners, said by phone. “Those two segments have the most unit growth” so that could drive acquisitions.

Any pickup in activity would mark an end to a lull brought on by the Patient Protection and Affordable Care Act, as insurers waited to gauge its implications. Since the beginning of 2013, less than $1 billion of publicly disclosed deals for U.S. health plan providers were struck. That’s a lower tally than in any given year from 2009 to 2012. With the new health-care system now up and running, there are fewer hurdles to acquisitions -- and more reasons to pursue them.

Cost Pressures

Insurers are under pressure to cut costs as health-care reform measures lead, in some cases, to higher expenses and lower reimbursements. They are also looking to expand in government-funded programs as Medicare enrollment surges to more than 50 million and state governments with tight budgets shift more Medicaid patients to managed-care companies.

Humana, the second-largest provider of Medicare Advantage policies, could be a logical target for Aetna or Anthem, according to Ralph Giacobbe of Credit Suisse Group AG. A takeover of Louisville, Kentucky-based Humana at about $222 a share, representing a premium of almost 25 percent to Wednesday’s close, would be accretive for both buyers on a cash basis, he estimated. St. Louis-based Centene, No. 3 in Medicaid, will grow faster than most other U.S. managed-care providers over the next two years and could also entice buyers.

Representatives for Humana, Aetna and Anthem declined to comment. Representatives for Centene and Tampa, Florida-based WellCare didn’t respond to requests for comment.

Deal Appetite

As the first baby boomers -- people born from about 1946 to 1964 -- started turning 65 years old in 2011, enrollment for Medicare has climbed. Membership in the program is expected to reach 68.4 million in 2023, up from a projected 54.4 million this year, according to the Centers for Medicare & Medicaid Services. Medicaid, meanwhile, will add 9.3 million people over the same period, CMS data show.

That’s making companies like Humana, Centene and WellCare, which have large shares of the government-based markets, coveted assets. The other incentive for acquirers is the prospect of cutting costs by consolidating operations. As physician groups and hospitals get bigger, insurers are facing pressure to merge to maintain their negotiating power, said Steven Halper, an analyst at FBR & Co.

“It is difficult to get through a conversation about managed care without the M&A topic coming up,” Giacobbe of Credit Suisse wrote in a report this week. “This has been driven in part by unbashful commentary by management teams citing appetite for deals.”

Anthem Options

Anthem Chief Financial Officer Wayne DeVeydt said this month that the company will probably keep doing small acquisitions similar to its takeover of Florida’s Simply Healthcare Holdings Inc. in February, though it’s not opposed to a bigger purchase.

“Ultimately, for significant scale, we may have to do something larger,” DeVeydt said.

The $42 billion company lacks a significant presence in Medicare with only a 3 percent share of the private-provider market for the program, and that’s why a Humana takeover could make sense, Giacobbe said. It’s probably less interested in buying a Medicaid provider, though a takeover of WellCare -- which is split almost evenly between Medicare and Medicaid -- could still have some merits, the analyst said.

Humana could be a buyer or a seller, because of its “unique positioning in a growing market and its strong valuation,” Peter Costa, an analyst at Wells Fargo & Co., wrote in a report Thursday.

Humana shares rose 1.3 percent to a new high of $180.96 on Thursday in New York. WellCare climbed 5 cents to $93.11 and Centene climbed 1.6 percent.

Pricey Targets

The biggest hurdle to acquisitions may be valuation. The Standard & Poor’s index of the biggest health insurers is at a record, after advancing 57 percent in the past year. That could make many potential deals too expensive, said Brian Wright, an analyst at Sterne Agee Group Inc.

Gupte of Leerink says consolidation among the five largest health insurers -- UnitedHealth Group Inc., Anthem, Aetna, Cigna Corp. and Humana -- is more likely than a deal for one of the smaller specialist firms. If two similarly sized insurers merged, the premium required could be lower, she said. Representatives for UnitedHealth and Cigna declined to comment.

Willing Sellers

On the other hand, high stock prices may actually make some companies more willing sellers. Both Humana and Centene are trading at records and WellCare is at its highest price since 2007, but there may not be much more left to those gains. Analysts are projecting that the stocks of all three companies will decline over the next 12 months. For Centene and Humana, the drop may be about 9 percent.

“Consolidation will again become a focus as companies seek to build out capabilities, drive scale efficiencies, and position for long-term growth,” Giacobbe of Credit Suisse wrote in his report. “Despite higher valuation levels, the synergy capture potential, the scarcity of assets, and the openness of managements to discuss appetite for acquisition makes a deal likely.”

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