Aetna Inc. (NYSE:AET) has tried to position itself for the world of Patient Protection and Affordable Care Act (PPACA) health insurance exchanges by agreeing to pay $7.3 billion for Coventry Health Care Inc. (NYSE:CVH).
The price includes $5.7 billion in cash and stock and an agreement by Aetna, Hartford, to take on responsibility for $1.6 billion in Coventry notes that will come due from 2014 through 2021.
Aetna is starting with 18 million enrollees, 437,000 Medicare Advantage enrollees, 1.2 million Medicaid enrollees, and $36 billion in projected 2012 revenue.
Coventry, Bethesda, Md., has 4 million enrollees, 253,000 Medicare Advantage enrollees, 932,000 Medicaid enrollees, and $14 billion in projected 2012 revenue. Coventry also has a network of 5,500 licensed agents, Aetna says.
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The boards of Aetna and Coventry have approved the deal. The companies still need to get approval for the deal from Coventry shareholders, antitrust regulators and state departments of insurance. The companies hope to complete the transaction by mid-2013.
The deal should help Aetna increase its market share in the Midwest and Mid-Atlantic states and put it on a more even footing with WellPoint Inc., Indianapolis (NYSE:WLP), and UnitedHealth Group Inc., Minnetonka, Minn. (NYSE:UNH), which each have about 36 million enrollees, Aetna says.
Aetna says it also likes Coventry’s emphasis on efficient, low-cost plans with relatively narrow provider networks.
The deal should help give Aetna the mix of plans and products it will need to succeed on the PPACA exchanges, Aetna Chairman Mark Bertolini said today during a conference call.
PPACA will require states and federal agencies to create a new system of exchanges, or Web-based health insurance supermarkets, that individuals and small groups can use to buy health coverage starting in 2014. PPACA also will require health carriers to offer coverage on a guaranteed issue, mostly community-rated basis.
See also: PPACA: A History
Aetna itself emphasizes the uncertainty surrounding PPACA in a discussion of deal risk factors.
“Components of the legislation will be phased in over the next 6 years, and Aetna will be required to dedicate material resources and incur material expenses during that time to implement health care reform,” the company says. “Many significant parts of the legislation…require further guidance and clarification both at the federal level and/or in the form of regulations and actions by state legislatures to implement the law. In addition, pending efforts in the U.S. Congress to repeal, amend, or restrict funding for various aspects of health care reform, the 2012 presidential and congressional elections, and the possibility of additional litigation challenging aspects of the law continue to create additional uncertainty about the ultimate impact of health care reform.”
If PPACA takes effect on schedule and the exchanges work as expected, many individuals will be able to move relatively freely between small group plans, commercial individual plans and Medicaid plans, and offering the right mix of different types of plans should help a company compete in that environment, Bertolini said.