(Bloomberg) — As more former hippies need hip replacements, health insurers from Humana Inc. (NYSE:HUM) to WellCare Health Plans Inc. (NYSE:WCG) are turning into hot targets.
Humana and WellCare, both providers of Medicare coverage, are generating record revenue as aging U.S. Baby Boomers drive an increase in enrollment in the government-sponsored program for the elderly. Insurers are also benefiting from expanded Medicaid coverage for the poor under the Patient Protection and Affordable Care Act (PPACA).
Larger insurers such as Aetna Inc. (NYSE:AET) and Anthem Inc. (NYSE:ANTM) would like to continue expanding beyond coverage that's paid for by employers, and could be interested buyers. A deal for either Humana, valued at $27 billion, or Medicaid provider Centene Corp. (NYSE:CNC), at $8.3 billion, would be the biggest acquisition of a U.S. managed-care provider in more than a decade. WellCare is smaller at $4.1 billion.
Some of the largest health insurers "don't have adequate Medicare and Medicaid exposure," Ana Gupte, an analyst at Leerink Partners, said by phone. "Those two segments have the most unit growth" so that could drive acquisitions.
Any pickup in activity would mark an end to a lull brought on by the Patient Protection and Affordable Care Act (PPACA), as insurers waited to gauge its implications. Since the beginning of 2013, less than $1 billion of publicly disclosed deals for U.S. health plan providers were struck. That's a lower tally than in any given year from 2009 to 2012. With the new health-care system now up and running, there are fewer hurdles to acquisitions — and more reasons to pursue them.
Cost pressures
Insurers are under pressure to cut costs as health-care reform measures lead, in some cases, to higher expenses and lower reimbursements. They are also looking to expand in government-funded programs as Medicare enrollment surges to more than 50 million and state governments with tight budgets shift more Medicaid patients to managed-care companies.
Humana, the second-largest provider of Medicare Advantage policies, could be a logical target for Aetna or Anthem, according to Ralph Giacobbe of Credit Suisse Group AG. A takeover of Louisville, Kentucky-based Humana at about $222 a share, representing a premium of almost 25 percent to Wednesday's close, would be accretive for both buyers on a cash basis, he estimated. St. Louis-based Centene, No. 3 in Medicaid, will grow faster than most other U.S. managed-care providers over the next two years and could also entice buyers.
Representatives for Humana, Aetna and Anthem declined to comment. Representatives for Centene and Tampa, Florida-based WellCare didn't respond to requests for comment.
Deal appetite
As the first baby boomers — people born from about 1946 to 1964 — started turning 65 years old in 2011, enrollment for Medicare has climbed. Membership in the program is expected to reach 68.4 million in 2023, up from a projected 54.4 million this year, according to the Centers for Medicare & Medicaid Services. Medicaid, meanwhile, will add 9.3 million people over the same period, CMS data show.
