Consolidation in Health Insurance sector also raises the specter of Layoffs

28 Jun 2015 | Author: | No comments yet »

Humana Said to Pursue Sale as Supreme Court Ruling Gives Insurers a Lift.

With Thursday’s Supreme Court ruling on President Barack Obama’s health-care overhaul out of the way, health insurers and hospitals can get back to making deals. A new round of consolidation in the health insurance industry appeared closer as companies seek to grow larger, driven in part by cost-cutting and opportunities that are part of the Affordable Care Act. Aetna, the second-largest U.S. health insurer by market value, is closing in on an acquisition of Humana and could reach a deal as early as this weekend. (Bob Child, Associated Press) Stock futures are staying relatively steady despite drops in foreign markets. Uncertainty over the case was the biggest obstacle to mergers and acquisitions in the health-care industry, said Bill Bithoney, a managing director in the consulting firm BDO USA’s health-care advisory practice. “People didn’t know what was going to happen.” Now that they do, consolidation may speed up.

The machinations of Humana — set against a backdrop of frenzied merger discussions within the insurance industry — received an extra jolt from the Supreme Court’s ruling on Thursday that the government could furnish tax subsidies for poor and middle-class Americans to buy health insurance. Insurers, especially, had been counting on those billions of dollars in tax subsidies to draw in new customers, particularly as Medicare and Medicaid turn to private health plans to offer coverage. On June 16, Fortune’s Shawn Tully wrote that “In the merger world, no sector is hotter than health insurance” and that if UnitedHealth and Aetna “were combined today, they would rank fifth on the Fortune 500, leapfrogging the likes of AT&T, Ford, and Apple.” But if the number of health insurers declines, the number available to a state’s consumers on the health care exchanges, which in some states is already very small, will shrink further—and provide even less choice to consumers.

Investors, too, were heartened by the ruling as shares in the major health insurers jumped on Thursday after the Supreme Court announced its decision. Trading in Humana’s stock was briefly halted and its price gained more momentum after Bloomberg News reported that it was near a deal to sell itself. The ruling could also clear the way for hospital acquisitions, and stocks of hospital companies rose Friday, extending Thursday’s jump following the ruling, which kept millions of potential patients insured instead of showing up in the emergency room without coverage.

Then again, maybe the market’s moves are not so surprising when we consider that a single-payer system is what is working for people in the U.S. who are over 65 (with Medicare)—and it’s what works well in many countries around the world. Community Health Systems Inc. gained 2.5 percent to $64.94, and Dallas-based Tenet Healthcare Corp. advanced 2.9 percent to $57.81. “You’re going to see dramatic consolidation within the hospital industry because they already have very thin margins,” said Chris Sassouni, a portfolio manager at Eagle Asset Management. “Scale will win.” Overall, about 10 million people have purchased health insurance on the exchanges set up by the health-care overhaul. That figure is projected to double next year, leaving plenty of expansion potential for both sectors. “Most insurers are breathing a sigh of relief and getting on with their business,” said Dan Mendelson, chief executive of Avalere Health.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://www.thevaluealliance.com), an independent board education and advisory firm she founded in 1999. The ruling is “good news for insurers who have invested in these markets and in the process of making a go of it commercially.” To post a comment, log into your chosen social network and then add your comment below. But Humana has struggled to meet Wall Street’s profit expectations for much of the last year, though it enjoyed rises in both its membership rolls and its revenue in the first three months of the year.

The company has been working with bankers at Goldman Sachs to sift through its potential deal options, fielding expressions of takeover interest from a number of suitors. While Humana is perhaps the least expensive takeover target within the big five insurers, with a market value of $27.6 billion, it faces a few distinct issues.

Among them is that its rival with the biggest financial resources to pursue a transaction, UnitedHealthcare, would most likely be barred by government regulators because both companies have major operations tied to Medicare. With UnitedHealthcare and Anthem both pursuing two of the most logical buyers of Humana, the smallest insurer risked being left alone — and competing against far bigger rivals — if it did not strike its own deal ahead of other potential transactions.

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