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Humana's evolution into Medicare powerhouse offers strong lure to Aetna

Posted On: Jul. 14, 2015 12:00 AM CST

An acquisition by Aetna Inc. would bring an end to the half-century of radical company makeovers by Humana Inc. and create an insurance giant in the fast-growing market for government-subsidized health plans.

Louisville, Kentucky-based Humana — a $23 billion company that began as a single nursing home in 1961 founded by David Jones and Wendell Cherry — is the second-largest player in Medicare Advantage, Medicare's private managed-care option that has seen enrollment triple in the past decade. That program will continue to grow, with a surge of baby boomers entering Medicare.

The deal, valued at $37 billion, would give Aetna access to technology and ancillary services acquired and developed by Humana to manage the cost and quality of care for chronically ill Medicare beneficiaries.

Humana has invested in care-coordination programs, employs nurses and care coordinators, and has a network of clinics that specialize in coordinating care for seniors. Humana's strength in the Medicare Advantage market, with its focus on retail customers, also could help Aetna shift to the consumer focus that many experts predict is the future of health insurance.

Medicare Advantage “is a very important part of our business because (it) encourages competition, value-based reimbursement and looking at individual members holistically,” Humana CEO Bruce Broussard said in an interview with Modern Healthcare this year. “It's a perfect example of where the consumer is making the choice. Providers are incentivized around quality and cost, and that forces integration.”

Humana has bought — and shed — companies in the past few years to bolster its Medicare business, including the $1 billion sale of Concentra in June. It continues to expand and is now the most widely available Medicare Advantage option nationally, with the broadest number of health plan choices, according to a Kaiser Family Foundation analysis.

Analysts say Humana would benefit from the deal, which would result in a more diversified company. Humana has limited business in the commercial-insurance market, which accounts for nearly two-thirds of Aetna's business when the company's administrative services contracts for self-insured employers are included. Commercial and administrative contracts account for one-quarter of Humana's business.

Aetna, based in Hartford, Connecticut, would gain significant clout in the Medicare Advantage business with the deal, adding Humana's 19% share of the market to its 7% share, according to Kaiser.

The combined company would have 4.34 million Advantage members with the addition of Humana's 3.2 million enrollees. Aetna operates Advantage plans in seven states and the District of Columbia, including three that overlap with Humana — Arizona, Florida and Texas.

“Together, we believe we will be very well-positioned to better serve and provide improved value to our customers and continue to capture our fair share of this growing marketplace,” Aetna CEO Mark Bertolini said as he described the deal to analysts.

The prospective partners are also players in the Affordable Care Act exchanges and in state Medicaid programs, where private managed care has grown dramatically.

The deal would create a company with 33 million members and 2015 revenue of $115 billion. Aetna reported premium revenue of $49.56 billion in 2014. Humana's premium revenue that year totaled $45.96 billion. Humana and Aetna executives touted the potential savings at $1.25 billion in 2018 before taxes. They also cited as an asset “Humana's chronic-care capabilities.”

The tie-up could give Aetna leverage to compete more aggressively on premiums in markets where regulation limits other ways that health plans can stand out from competitors, said Moody's Investors Service Analyst Stephen Zaharuk.

For example, the health care reform law requires health plans to include a standard set of essential benefits. “These products are more of a commodity,” he said. “Price is a very important component of consumer choice.”

The ACA exchange experience so far has shown that individuals and families are highly price-sensitive. But whether Aetna would use its much bigger size to reduce prices is uncertain. “That's possible,” said Amanda Starc, an assistant professor of health care management at the University of Pennsylvania's Wharton School. “If I were trying to make the case that this was not going to be an anticompetitive merger, that's what I would say.”

Instead, Aetna could use its bigger size to squash competition to the detriment of consumers, Ms. Starc said. Research suggests that could happen.

Consolidation means fewer competitors, and fewer competitors mean higher premiums, one study of ACA exchange markets determined. The analysis found premiums for exchange plans would have been lower if UnitedHealthcare had entered those exchange markets. Competition from UnitedHealthcare would have lowered the average plan premium by 5.4%; average premiums would have been 11.1% lower if every insurer competed in the exchange in states where they operate.

“When you have a fairly concentrated market, there are more profitable opportunities” to differentiate other than by price competition, said Leemore Dafny, author of the study and a health care strategy professor at Northwestern University, who said it isn't clear whether insurers would pass on savings to consumers.

Takeaways

Humana's strength in the Advantage market, with its focus on retail customers, could help Aetna shift to the consumer focus that many experts predict is the future of health insurance.

Humana was started by two Louisville lawyers who co-founded a nursing home, according to a history of Humana published on the website FundingUniverse.com.

They rapidly added nursing homes in other states to their company, then called Extendicare, which became the nation's largest nursing home company at the time. Extendicare acquired its first hospital in 1968, and within several years acquired more. In 1972, it divested its nursing homes and focused on hospitals. It changed its name to Humana in 1974. As the third-largest hospital chain, it bought the second-largest chain, American Medicorp, in 1978.

By 1982, Humana had nearly 100 hospitals, mainly in the Sunbelt. In 1984, the company launched Humana Health Care Plans, primarily as a way to keep patients within its hospitals. In 1993, with its health plans doing well, it spun off its hospital division into a new company called Galen Health Care, which quickly merged with Columbia Hospital Corp., later known as Columbia/HCA.

Then Humana went on a corporate buying spree, acquiring health plans around the country, with major investments in Florida.

In 2014, when the ACA's individual insurance exchanges started, Humana became one of the most aggressive participants among commercial insurers. It currently competes for customers in 15 states. The company enrolled 730,800 exchange plan members as of the end of March in ACA markets that are projected to include 22 million people within 10 years.

For its part, Aetna ranks among the top five companies in Medicaid managed care by number of states. States have dramatically expanded their Medicaid managed-care programs, and the enrolled population has swelled in the 28 states that so far have expanded Medicaid eligibility to low-income adults under the ACA.

With the acquisition of Humana, Aetna may be better-positioned to compete in these government-subsidized markets, which are individual-consumer-focused and more regulated than prior to the ACA, analysts say. The greater size could help reduce operating costs and increase negotiating clout with hospitals and doctors, areas where consolidation is also underway.

Humana's recent acquisitions have targeted technology and ancillary services to manage chronically ill patients. The company reported a 50% increase in 2014 from the prior year to 420,700 members who are enrolled in the Humana Chronic Care Program.

Humana acquired SeniorBridge Family Cos. three years ago and renamed it Humana at Home. SeniorBridge was a home health care company for the chronically ill and is one of Humana's recent deals to boost its primary care and care-coordination business.

Humana acquired Metropolitan Health Networks in late 2012 and American Eldercare the next year. Both are in Florida, Humana's largest market.

Metropolitan Health Networks manages care for Medicare and Medicaid enrollees. Those assets and others have the potential to be expanded into new markets, the company said in regulatory filings.

American Eldercare is a home- and community-based care provider for seniors. The company also operates multispecialty medical centers in South Florida.

The focus on Medicare Advantage prompted Humana to jettison its occupational-health subsidiary, Concentra, for $1 billion earlier this year. It acquired the company in 2010.

Mr. Broussard said Humana is using remote monitoring technologies with its Advantage members to help them better manage their health.

Humana also recently launched two population-health divisions, Transcend and Transcend Insights, to market care coordination and data analytics to providers.

“Transcend Insights is a great example of an application that can help physicians manage their patients with a mobile device, iPad or mobile phone,” Mr. Broussard said. “They can see gaps in care and data analytics, allowing them to recommend the next best action for their patients.”

The proposed Aetna-Humana deal is not the only proposed combination of major health insurers.

Medicaid managed-care company Centene Corp. said this month it would acquire Health Net for $6.8 billion. Anthem has made a bid for Cigna and UnitedHealth Group is reportedly looking for a deal.

Those deals, if approved by antitrust regulators, may require insurers to exit markets where the merger would create too much concentration.

The flurry of activity comes after the first year of insurance expansion under the ACA, which absorbed insurance companies' attention as they sought to grapple with new regulations and uncertainty over how markets would operate, said Joseph Marinucci, the lead analyst for Humana at Standard & Poor's.

“The sense is, they've gotten through this period of understanding what they're dealing with,” he said.

The potential that antitrust regulators will block Humana's acquisition is an expensive one for Aetna, which would pay Humana $1 billion in that event.

Another potential cloud is that the U.S. Justice Department has asked Humana for more information about its Medicare Advantage risk-adjustment practices, based on a whistle-blower lawsuit from several years ago, Humana disclosed in a regulatory filing this year.

Melanie Evans writes for Modern Healthcare, a sister publication of Business Insurance.