UnitedHealth, Aetna Win TRICARE Contracts, Replacing Humana, Health Net

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July 14, 2009 Tuesday 04:55 PM EST

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UnitedHealth, Aetna Win TRICARE Contracts, Replacing Humana, Health Net

Fran Lysiak

WASHINGTON

UnitedHealth Group Inc. and Aetna Inc. have been awarded multibillion-dollar contracts from the U.S. Department of Defense to provide health services for the department's TRICARE health plan for active-duty and retired military service members and their families, replacing competitors Humana Inc. and Health Net Inc.

The new, five-year contracts are expected to start on April 1, 2010.

"This is one of those classic situations where the announcement is bad for the industry as a whole, since it doesn't add much new earnings to either Aetna or United, but it takes away a significant amount of earnings from Health Net and Humana," wrote Carl McDonald, an equity analyst with Oppenheimer & Co., in a research note.

"The issue is far more acute for Health Net," he wrote, because TRICARE accounts for more than a third of profits relative to its depressed earnings per share base, whereas TRICARE is just a small part of Humana's earnings stream.

In a statement, UnitedHealth (NYSE: UNH) said it will be the contractor serving about 3 million TRICARE beneficiaries in the south region, which includes Alabama, Arkansas, Florida, Georgia, the Fort Campbell area of Kentucky, Louisiana, Mississippi, Oklahoma, South Carolina, Tennessee and portions of Texas.

The contract's value is $21.8 billion and includes $1.5 billion for management support and services, UnitedHealth said. The company also may earn additional "incentive fees" based on its performance against contract standards.

UnitedHealth will provide medical management, claims processing, customer service, provider networks, as well as support, such as cost-trend risk management and fraud detection.

Humana (NYSE: HUM) currently holds the south region contract, which it said is set to expire on March 31, 2010.

"Humana Military is disappointed with the decision by the Department of Defense and looks forward to obtaining further clarity via a debriefing on the bidding process," said Dave Baker, president and chief executive officer of Humana Military, in a statement. "Our company will evaluate its strategic options with respect to the government's decision, including protesting the award, and will act expeditiously to best position Humana for continued success."

Humana said it couldn't expect what impact the loss of the TRICARE contract may have on its 2009 earnings.

The Department of Defense awarded Aetna the TRICARE contract for the north region under which it will support delivery of health care to about 2.8 million TRICARE beneficiaries based in the 21 states of that region.

The Aetna contract is $16.7 billion, said McDonald. Aetna couldn't immediately be reached for comment.

The north region, currently held by Health Net (NYSE: HNT), includes Connecticut, Delaware, the District of Columbia, Illinois, Indiana, Kentucky, except for Fort Campbell; Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Vermont, Virginia, West Virginia, Wisconsin and portions of Iowa and Missouri.

"Health Net Federal Services is disappointed not to be selected by TRICARE Management Activity for the Managed Care Support Contractor in the TRICARE North Region," said Steven Tough, president of Health Net Federal Services, in a statement.

UnitedHealthcare companies currently have Best's Financial Strength Ratings ranging from A to A- (Excellent); Aetna companies currently have Best's Financial Strength Ratings ranging from A to A- (Excellent); Humana companies currently have Best's Financial Strength Ratings ranging from A- (Excellent) to B+ (Good); Health Net companies currently have Best's Financial Strength Ratings of B+ (Good).

(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)

July 15, 2009