Aetna, one of the nation's biggest health insurers, staked a $5.7 billion claim in the burgeoning market for government-funded coverage Monday when it announced plans to buy fellow insurer Coventry Health Care.
The Hartford, Conn., company's proposed cash-and-stock acquisition of Coventry will bolster its Medicaid enrollment months before millions of uninsured Americans are expected to become eligible for coverage through that state-federal program as part of President Barack Obama's massive health care overhaul.
The deal also ramps up Aetna Inc.'s Medicare Advantage and Medicare prescription drug businesses, as interest in these plans grows while the baby boomer generation ages and becomes eligible. Medicare Advantage plans are privately run versions of the government's Medicare coverage for the elderly and disabled people.
Aetna said Monday it will pay $42.08 for each share of Coventry stock. That includes $27.30 in cash and a portion of its stock. The price represents a 20 percent premium on Coventry's Friday closing price of $34.94.
The $5.7 billion deal's value rises to $7.3 billion when counting debt from Coventry Health Care Inc., which is based in Bethesda, Md.
Medicaid is the state-federal program that provides coverage for the needy and disabled. States hire insurers to offer Medicaid coverage to their residents. The program currently covers more than 60 million people and is expected to expand coverage starting in 2014, or about six months after the Coventry deal is projected to close.
Aside from the overhaul expansion, insurers also see growth opportunities in Medicaid due to patients who are eligible for both that program and Medicare. States are starting to move these so-called "dual eligible" residents into managed care programs that coordinate care and cut wasteful spending.
These patients generally have chronic or expensive medical conditions. When their care isn't coordinated, tests can be duplicated, and people who would qualify for Medicaid may not sign up because they aren't aware they are eligible.
Aetna is the nation's third largest health insurer based on enrollment, trailing UnitedHealth Group Inc. and WellPoint. Inc. Medicaid and Medicare Advantage currently represent small slices of Aetna's enrollment, but it expects the deal to raise the revenue it draws from government business to 30 percent, from 23 percent.
Coventry said last month that its Medicaid enrollment doubled to about 1.5 million people.
Aetna also strengthened its government business last year when it acquired Genworth Financial's Medicare supplement business, which provides supplemental coverage to people on Medicare. Other insurers also have moved to strengthen their government business with multibillion-dollar deals.
Last month, WellPoint, which offers Blue Cross-Blue Shield plans in 14 states, said it would spend $4.46 billion to buy another insurer that specializes in Medicaid, Amerigroup Corp. Earlier this year, Cigna Corp. completed its purchase of HealthSpring for nearly $4 billion as it grabbed for a share of Medicare revenue.
Aetna said Monday the boards of both companies have approved the deal, but it is still subject to Coventry shareholder approval and regulatory review.
Aetna will pay for the acquisition with cash and about $2.5 billion in new debt and commercial paper. It expects the deal to modestly help earnings next year, not counting transaction costs. Aetna forecasts a gain of about 45 cents per share to its annual earnings in 2014 and 90 cents per share in 2015 from the deal.
Shares of Coventry climbed more than 17 percent, or $6.09, to $41.03 Monday in premarket trading, while Aetna shares rose 2.8 percent, or $1.06, to $39.10.