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Aetna to Acquire Coventry for $7.3 Billion

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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.

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.

Bertolini said Aetna believes it had to move on making any acquisition designed to help the company compete in 2014 quickly.

“We would say time is running out to get a transaction done,” Bertolini said.

Bertolini said Coventry is especially attractive as 2014 nears.

“They’re ahead of most of the other businesses in getting ready for health care reform,” Bertolini said.

Neal Freedman, a credit analyst at Standard & Poor’s Ratings Services, New York, says in a comment on the deal that it is the largest Aetna has announced in more than decade.

The need to combine the Aetna and Coventry information systems, marketing organizations and provider networks will create significant integration risks, but the deal also should help add to Aetna’s product diversity and geographic diversity, Freedman says.

Analysts at Moody’s Investors Service, New York, say they have concerns about Aetna’s plans to fund the deal with $1.2 billion in cash, $2 billion in stock, and the issuance of about $2.5 billion in new debt and commercial paper.

The deal would lower Aetna’s risk-based capital (RBC) ratio to 275% of the company action level, and Moody’s is looking into the possibility of lowering the company’s ratings, the analysts say.

But “Aetna has reported very strong operating  earnings over the last two years while preparing and investing for the  challenges of operating under health care reform,” Steve  Zaharuk, a senior vice president at Moody’s, says in a statement.

Aetna is announcing the deal about 10 years after health insurers were rushing to flee from the predecessor to the Medicare Advantage private Medicare plan program, the Medicare + Choice program.

Aetna said in late 2001, for example, that federal changes in Medicare + Choice funding rules made offering coverage through the program unsustainable.

Today, Aetna and competitors are trying to persuade federal agencies and Congress to maintain strong Medicare Advantage program funding.

The federal agencies are trying to persuade states to agree to meet the Medicaid eligibility expansion goals included in PPACA. PPACA requires the federal government to provide most of the funding needed to pay for Medicaid expansion. Governors in some states say they are not sure whether the federal government will live up to the funding commitments.


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