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Aetna Health Insurance announces the acquisition of Coventry Healthcare for $5.7bn

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Aetna Inc., a major health insurance Company in the Philadelphia region, announced plans to buy Coventry Health Care Inc. in a $5.7 billion cash-and-stock deal. The purchase will increase the Aetna’s presence in government-financed health care programs such as Medicaid and Medicare. The acquisition will take place before major provisions of Affordable Care Act come into effect.

Aetna in rush to expand its business

According to changes introduced by Obama administration, in 2014 many states are expected to expand Medicaid to cover a large number of those uninsured. The expansion of Medicaid means increasing business opportunities for those companies who run those programs, Medicare as well, for states. Moreover in 2014 state-run insurances exchanges will start working, thereby allowing individuals and small companies to buy health coverage.

Aetna wants to expand its market and because of that it has decided to have a deal with Coventry. But the purchase of Coventry will also boost Aetna’s commercial membership. Mark T. Bertolini, chief executive at Aetna, said: "Integrating Coventry into Aetna will complement our strategy to expand our core insurance business, increase our presence in the fast-growing government sector and expand our relationships with providers in local geographies." And those are reasons why Aetna plans to purchase Coventry and enter the Kentucky’s Medicaid market. If the transaction comes into force, Aetna will reinforce its position as the third-largest manage-care company by membership, just behind UnitedHealthGroup Inc. and WellPoint Inc. On 30th of June Aetna did have 22 million combined medical members.

The transaction of purchase of Coventry has been signed by both boards of directors. However the contract has to be approved by Coventry’s shareholders. The deal will double Aetna’s Medicaid revenue and triple its Medicaid membership. As it has been highlighted by data, a company’s share of revenue from government-backed programs will gain from 23 percent to 31 percent. The company is confident that despite president budget turmoil government-financed programs will remain important part of health-care system.

The purchase of Coventry will also help Aetna to expand its presence in the five-county Southeastern Pennsylvania region, where the insurer is the second-biggest one, just behind Independence Blue Cross. On the other hand Coventry is strongly engaged in that region.

Certainly the purchase of Coventry is profitable for Aetna. A wide range of insurance services, including government-backed programs are offered by Coventry, which is based in Bethesda, Md. The company earned $543.1 million last year on revenue of $12.2 billion; Coventry shares gained 17.5 percent in 12 months before the transaction was made public.

Aetna has said that the deal is expected to be closed by the middle of 2013. According to data, the purchase of Coventry will lead to roughly $400 million of annual saving by 2015. And most importantly, Aetna will get a better access to markets like Florida, Kentucky and Pennsylvania.

Consolidation trend

Latest changes introduced to health care system by Obama administration have led to increasing number of consolidation in the industry. Consolidation processes are gaining on popularity because they seem to be a chance of a growth and prosperity. Not so long ago, because just last month, WellPoint decided to buy Amerigroup for about $4.9 billion. As a result WellPoint increased its presence in the markets for Medicare, for older patients, and Medicaid, for poor patients. But companies such as DaVita, Cigna and private equity firms BC Partners and Silver Lake also signed the multibillion-dollar transactions.

However the purchase of Coventry would be the biggest in the managed health care market since the Affordable Care Act was signed in 2010.

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