With Humana seemingly in limbo over a rumored merger, executives of the largest for-profit health insurers didn't tip their hands over whether they were potential suitors Wednesday at the Goldman Sachs Global Healthcare Conference.
Aetna, Anthem and Cigna Corp.—each considered to be potential buyers for Humana—presented at the event. Humana, which reportedly hired Goldman Sachs to test the consolidation waters, was scheduled to be there as well, but the company backed out earlier this week and went into a self-imposed quiet period until the end of July. Brian Kane, Humana's chief financial officer and a former Goldman Sachs executive who worked on managed-care transactions, was supposed to speak at the conference.
Many financial analysts believe Aetna will take over Humana because a deal would most benefit Aetna's bottom line. Aetna CEO Mark Bertolini did not address Humana's situation at the conference. He reiterated past comments by saying his company would be willing to take on debt to finance a transaction that makes strategic sense, like it did with Coventry in 2013. But he said long term, Aetna will have to focus on increasing sales of its own health plans.
“If you really get down to the strategy and what it takes to win, our best use of capital is to organically grow,” Bertolini said. “Sooner or later, you run out of assets to buy.”
Moody's Investors Service has a somewhat reserved view that Aetna would make a play for Humana, a dominant Medicare Advantage company that covers more than 3 million seniors. The credit-rating agency upgraded Aetna's debt last month with “the expectation that there will not be a large debt-financed acquisition over the next 24 months.” As of March 31, Aetna's debt-to-capital ratio was almost 39%, meaning an acquisition of Humana would likely have to include a large amount of stock equity.
Cigna took on a lot of debt in 2012 when it bought HealthSpring, a Medicare Advantage plan. Cigna CFO Tom McCarthy said the insurer is not opposed to leveraging debt, but “there are different ways to play the game to win.” Local market dynamics, the ability to engage physicians to manage care and other tangential factors dictate how Cigna views potential targets.
“Scale is good, more scale is better, focus is more important,” McCarthy said without discussing Humana.
Anthem CEO Joseph Swedish said the most valuable transactions are those that keep or make Anthem a top insurer in a given market. Deals such as its purchase of Simply Healthcare, a Florida-based HMO for Medicare and Medicaid beneficiaries, fit that mold, he said.
“We're mindful of scale and mindful of the commitment to growth,” Swedish said. “We'll be there if the opportunity presents itself.”
Caught in the shuffle of merger speculation is the King v. Burwell case before the U.S. Supreme Court. Insurers may be hesitant to pull the trigger on any deal until they know the status of the Affordable Care Act's premium subsidies. However, many executives are optimistic lawmakers would create some kind of solution to keep the markets stable, although legal experts are not nearly as sanguine.
“We're worrying about a whole bunch of stuff that doesn't matter,” Bertolini said of the King case. “There's a one-sentence fix.”