Coventry Health Care wants to play with the big boys. The Bethesda, Md.-based health insurer, which covers 2.4 million members through regional HMOs in 15 markets, last week agreed to acquire First Health Group Corp. in a $1.8 billion deal that would expand its presence into all 50 states and beef up its product line. With 1.5 million members, Downers Grove, Ill.-based First Health caters mostly to self-insured clients, workers' compensation payers and Medicaid programs.
The deal is the fifth-largest insurance industry acquisition to be announced in the past five years, and is by far the biggest for Coventry, which has traditionally targeted local health plans in the p$10 million to $20 million range. Its largest acquisition to date was that of Principle Health Care for $375 million in 1998.
The deal, which continues a spate of insurance industry mergers, would solidify Coventry's place as the nation's eighth-largest publicly traded health insurer, assuming Anthem completes its pending $16.4 billion acquisition of WellPoint Health Networks.
Its new size would help the company compete for clients at a time when employers are steadily winnowing the number of insurers they use and opting for those with broad geographic reach, company officials said.
"The acquisition of First Health enables us to extend our success far beyond our borders," Coventry President and Chief Executive Officer Allen Wise said in a news release. "This transforming acquisition positions Coventry to be a leader over the coming years as our clients seek an efficient solution to their healthcare costs challenges."
Wise, 62, announced last month that he will retire at year-end and be replaced by Chief Financial Officer Dale Wolf. Coventry said it plans to name a new CFO from inside company within 30 days.
Reaction was decidedly more tempered among analysts, who questioned the strategic benefit of the merger and noted that the announcement comes as both companies are grappling with weakening results.
First Health reported declining net income in both of the first two quarters of the year, because of increased competition and lower-than-expected revenue from its contract with U.S. mail handlers. And last week, it cut its 2004 earnings forecast for the second time this year, citing slower-than-anticipated growth in its workers' compensation unit.
Meanwhile, Coventry last week reported a 29% jump in third-quarter net income, to $87 million, or 96 cents per share, on a 15.6% increase in operating revenue to $1.33 billion. But the company's enrollment dropped by 11,500 members during the quarter because of the loss of two contracts. Wise said he expects more membership declines next year after losing two other large accounts, including 29,000-employee BJC HealthCare, St. Louis, which consolidated its health benefits with WellPoint.
"Results from Coventry and First Health suggest both companies are struggling with increased competitive pressure that we believe will worsen going into 2005," Goldman Sachs Group analyst Matthew Borsch said.
Health insurers nationwide have been consolidating at a rapid clip as they seek ways to expand membership at a time when job growth has slowed and employers are cutting back on benefits.
But lately, these deals have faced more rigorous scrutiny by regulators and industry groups that fear the spate of mergers will shrink the insurance market to the point where it actually becomes anticompetitive.
California Insurance Commissioner John Garamendi single-handedly stalled Anthem and WellPoint's planned mega-merger, claiming it would hurt policyholders and unfairly enrich WellPoint executives (Aug. 2, p. 14). A hearing on the matter is scheduled for Feb. 25, 2005, in Los Angeles Superior Court.
Meanwhile, the Medical Society of New Jersey has sued to reverse UnitedHealth Group's $4.9 billion acquisition of Oxford Health Plans (Aug. 9, p. 14). The doctors argue that the resulting market concentration will lead to higher premiums, lower reimbursements for providers and poorer quality healthcare.
The Coventry-First Health merger is expected to close in the first quarter of 2005, pending regulatory approval. Although a portion of the deal will have to be approved by California's Garamendi, the companies don't foresee any major obstacles, Coventry's Wolf said during a conference call with analysts.
Under the deal, First Health investors will get a 0.1791 share of Coventry stock and $9.375 in cash for each of their shares. Coventry said it will finance the purchase with existing cash and a new $950 million bank line of credit.