Obama's healthcare plans prompt more M&A activity among insurers

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http://www.datasite.com --The news of another, extremely valuable takeover deal in the health insurance sector underlines the impact of Obama’s healthcare overhaul on the health insurance M&A market.

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Obama's healthcare plans prompt more M&A activity among insurers

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The news of another, extremely valuable takeover deal in the health insurance sector underlines the impact of Obama’s healthcare overhaul on the health insurance M&A market.

Earlier this week, health insurer, Aetna Inc announced that it would pay $5.6 billion for Coventry Healthcare in a bid to double its government Medicaid health plan business. The move is set to add as many as 5 million customers to Aetna’s books as Obama looks to cover a further 16-17 million more Americans with health insurance.

The deal was an obvious one in the eyes of analysts, who claims that Aetna needed to expand in order to make a mark in the managed care industry. Thomas Carroll of Stifel Nicolaus & Co, for example, told the San Francisco Chronicle: "It’s a deal that almost had to happen. For Aetna to really compete effectively amongst the other large national managed care companies, they have to do more in terms of gaining market share in the commercial business as well as getting a bigger foothold in Medicare and Medicaid, which are the growth areas in managed care over the next decade.

This is unless the Republican presidential candidate Mitt Romney wins the election in November and follows through on his pledge to reverse Obama’s health care program. Although this is a very real threat, it doesn’t seem to be putting health insurers off of going ahead with the consolidation of the market. In fact the Aetna deal is just the latest in a long line of such mergers in recent months.

The Aetna-Coventry takeover is the largest deal in terms of value in recent years, but there have actually been a total of 119 M&A deals among health-maintenance organizations over the past five years. The average size of which was $646.6 million. The figures, compiled by Bloomberg, also suggest that buyers are willing to pay a premium in these deals. The deal Aetna offered Coventry shareholders, for example, represented a 20 per cent premium on the closing share price. The average premium paid throughout the past five years is an impressive 30 per cent.

So why are so many health insurance players interested in consolidation despite the uncertain nature of Medicaid and Medicare’s future? If Aetna’s outlook is anything to go by, the answer is simply that there is plenty of business to be had regardless of Obama’s latest moves.

Joseph Zubretsky, Aetna’s Chief Financial Officer, told Reuters: “The election and SCOTUS are not critical in our strategic thinking. We think we had a very good opportunity to gain better access to government-based revenues at valuations that were made very reasonably.”

When asked about the uncertainty surrounding the election and Romney’s plans for the healthcare system, he replied, “The need for scale doesn’t change. We see that with hospitals and physicians merging into bigger chains as well as the insurers.”

Mr Zubretsky concluded by predicting that the current boom in health insurance M&A, involving deals - such as WellPoint’s $4.46 billion takeover of Americagroup in July and Cigna Corp’s buyout of HealthSprings in October – would continue into the future. “There has been a lot of consolidation recently,” he said. “And I see no reason why there wouldn’t be more.”

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