With Humanasilent on a rumored merger, leaders of the largest publicly traded health insurance companies offered no clues at an investor conference last week about whether they are bidding.
Aetna, Anthem and Cigna Corp.presented at the Goldman Sachs Global Healthcare Conference in Rancho Palos Verdes, Calif. Humana, which reportedly hired Goldman Sachs to test the consolidation waters, backed out of the conference 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, canceled his scheduled talk.
Many financial analysts predict Aetna will acquire Humana because it would benefit the most from the deal. Aetna CEO Mark Bertolini did not address the Humana situation at the conference. He said his company would be willing to take on debt to finance a transaction that makes strategic sense, as it did with Coventry in 2013. But in the long term, Aetna must focus on increasing sales of its own health plans, he said.
“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 cautious view that Aetna will 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 acquisition of Humana likely would 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 Chief Financial Officer Tom McCarthy said his company is not opposed to leveraging debt but adds, “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,” he said, without discussing Humana.
Anthem CEO Joseph Swedish said the most valuable transactions are those that establish Anthem as a top insurer in a given market, such as its previous purchase of Simply Healthcare, a Florida-based HMO for Medicare and Medicaid beneficiaries. “We'll be there if the opportunity presents itself,” he said.
Insurers may be hesitant to pull the trigger on any deal until the U.S. Supreme Court rules this month on the fate of the Affordable Care Act's premium subsidies.