Aetna’s Prize in Humana Deal: Government $$$

The prize in Aetna’s purchase of Humana is in Humana’s huge Medicare business and the combined company is expected to create a “formidable” managed care organization (MCO) with important market share in some states, an analyst said Monday.

In a research note to investors, Thomas A. Carroll, managing director of Stifel Nicolaus & Co., said the Aetna-Humana combination “will create a formidable MCO competitor on a national basis across all population groups backstopped by a decide suit of information technology capabilities.”

The transaction, announced Friday, will close sometime next year.

“We continue to like Aetna as it looks to conduct its second transformative deal in less than three years,” Carroll also wrote. “Humana brings to Aetna a tremendous asset in terms of its national MA (Medicare Advantage) presence and expertise.”

In Florida, the combined new company would control 43 percent of the existing Medicare Advantage market and 17 percent of all Medicare eligible residents, Carroll noted.

He also wrote that the combined company is also expected to have a major presence in Kansas, West Virginia, Louisiana and Ohio.

Medicare Advantage is a type of Medicare plan offered by private insurance carriers, like Aetna and Humana, that contract with Medicare to provide hospital services and preventive care.

With baby boomers signing up for Medicare in record numbers, health insurers covet the Medicare segment and executives said Humana would add 4.4 million stand-alone Medicare Part D members.

In a conference call with analysts Monday morning, Aetna and Humana executives said that by the end of the year, revenue from government health care programs — Medicare and Medicaid — will make up 56 percent of the $115 billion pouring into the combined company.

The remainder would come from commercial accounts and other programs.

Aetna, based in Hartford, Connecticut, derives 38 percent of its $61 billion in revenue from Medicare and Medicaid and 49 percent from commercial accounts.

Humana, based in Louisville, Kentucky, derives 76 percent of its $54 billion in revenue from Medicare and Medicaid and only 18 percent from commercial accounts.

In a conference call Monday, Aetna Chairman and CEO Mark T. Bertolini said the $37 billion deal, announced Friday, would expose Aetna to faster-growing government health programs such as Medicare Advantage and Medicare prescription drug plans.

The combined company expects to save as much as $1.25 billion a year by 2018 in operating expenses and restructuring its health care delivery network, executives said.

The company’s government business, made up of Medicare, Medicaid and TRICARE, health care services for active duty members and veterans, will be based in Humana headquarters in Louisville, company officials also said.

Government data indicate that in 2013, there were 52.2 million people enrolled in Medicare.

The Aetna-Humana deal comes after Cigna Corp. last month quashed attempts by Anthem to merge but Ana Gupta, an analyst with Leerink Partners was quoted by Bloomberg as saying the Aetna-Humana deal paves the way for Anthem and Cigna.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at cyril.tuohy@innfeedback.com.

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at cyril.tuohy@innfeedback.com.