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How Humana hitched with Aetna (and drove Cigna to Anthem)

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The back story behind Aetna Inc.'s acquisition of Humana Inc. reads like a soap opera in which each of the “big five” health insurance companies were involved and multiple deals were hanging in the air at the same time.

At multiple points, Aetna was prepared to walk away from the deal, according to a new Securities and Exchange Commission filing from Humana. Humana even had to halt the sale process after finding problems with its Medicare Advantage data. But Hartford, Connecticut-based Aetna ultimately completed the deal in early July, agreeing to buy Louisville, Kentucky-based Humana in a $37 billion deal.

Humana's pursuit of a partner began in October 2014, and Aetna was not the first to be involved, the filing shows. Humana CEO Bruce Broussard and Chief Financial Officer Brian Kane met with Cigna Corp. CEO David Cordani and CFO Thomas McCarthy. (Cigna is referred to as “Party X” in the disclosure.) The executives discussed the possibility of combining their companies and the general state of consolidation.

By December, Humana's board held a meeting and brought in financial adviser Goldman Sachs to discuss potential moves in the industry. The meeting was a precursor to a spate of events that resembled speed dating for health insurers.

One month later, Aetna received a takeover offer from UnitedHealth Group, called “Party A” in the filing. UnitedHealth had made overtures to Aetna since August 2014 and made a formal bid of $104 per share on Jan. 14. That was the day after Aetna CEO Mark Bertolini told investors at the J.P. Morgan Healthcare Conference in San Francisco that Aetna was ready to make big moves if necessary.

“It'll take one transaction to tip the whole thing off,” Mr. Bertolini said, adding that the second quarter of 2015 was going to be an “important” time to monitor potentially influential health insurance deals.

Aetna thought UnitedHealth's proposed price “was not at an attractive level” and decided to not negotiate with UnitedHealth further, according to the document. The offer valued Aetna at about $36.4 billion, but that was far below industry valuations, which pegged an Aetna purchase price at around $64 billion. However, UnitedHealth's offer forced Aetna to start considering all of its options.

Discussions among the big payers accelerated in March. Mr. Broussard and Anthem CEO Joseph Swedish met on March 4 to discuss a potential deal. (Anthem is designated “Party Y” in the filing.) Mr. Broussard and Aetna's Mr. Bertolini got together later that month to discuss their own potential scenarios.

Cigna was the first party to make a play for Humana, on April 25 offering to buy the insurer for $230 per share in cash and stock — the price that Aetna ultimately paid. Humana officials then decided to evaluate whether Humana should remain a stand-alone company or open up a competitive bidding war.

Mr. Cordani called Mr. Broussard twice in early May to ask about Cigna's offer and what the next steps would be. During that time, Mr. Broussard called Mr. Bertolini and told him Humana “was not prepared” to consider a deal with Aetna at that time, the filing reads. After analyzing Cigna's offer as well as its own financial statements, Humana decided on May 19 to not accept Cigna's proposal and open up the sale process to Aetna, Anthem and Cigna.

By May 27, Humana and Goldman Sachs started sending out some of Humana's nonpublic financial data to the interested insurers to review. But then the Wall Street Journal filed a report that said Humana was in the process of selling its operations, which caused a huge spike in Humana's stock price. At that point, Humana had been working with Goldman Sachs for several months.

Humana moved forward despite the media reports and received official interest from Aetna and Anthem. But Humana temporarily suspended the bidding process at the beginning of June. Humana looked at May claims for its Medicare Advantage business — which represents three-quarters of its revenue — and determined it was not sure if its reserves were adequate to cover spikes in utilization. Humana had sent managed-care stocks into a tailspin in April when it said it was experiencing higher-than-expected inpatient admissions from its Medicare members.

Under the radar

Aetna, Anthem and Cigna did not tip their hands about the dealings during a Goldman Sachs conference on June 10. The companies didn't even acknowledge they were participating in an auction for Humana.

Humana resumed negotiations with all parties on June 16 after determining its Medicare figures and reserves were in the clear, according to the regulatory disclosure. At this point, rumors of an Anthem-Cigna tie-up had proliferated, but Mr. Swedish told Mr. Broussard that Anthem was still interested in Humana.

Aetna cranked up its interest in the middle of June by offering to buy Humana for $225 per share. Humana rejected the proposal, and Aetna bumped up its offer to $230 per share, the same amount that Cigna had offered in April. A few days later, Mr. Broussard called Mr. Bertolini asking for $240 per share, which was spurned.

Anthem disrupted the process on June 20 when it publicly proposed to acquire Cigna in a deal valued at $53.8 billion, effectively taking Anthem out of the running for Humana. Cigna rejected and criticized Anthem's offer, and Mr. Cordani told Mr. Broussard that Cigna still intended to submit another formal offer for Humana. On June 24, Cigna offered to acquire Humana for $225 per share, lower than its original offer and lower than Aetna's bid at the time.

Meanwhile, Aetna had hired a consulting firm to look at Humana's Medicare Advantage and Part D bids for 2016. However, Mr. Bertolini was ready to walk away from the deal after Humana insisted on a price tag of $240 per share, according to the document.

UnitedHealth still lurked in the shadows as Aetna, Anthem, Cigna and Humana juggled multiple balls at once. But Aetna decided to quash any takeover from UnitedHealth during a June 26 board meeting. Aetna and UnitedHealth are both large players in the Medicare Advantage space, and Aetna officials said “that the regulatory and related risks of a potential transaction with Party A were significant” and that UnitedHealth had not addressed the risks “in any credible way.”

In addition, UnitedHealth had not updated its purchase price for Aetna, which was well below market estimates. Analysts have suggested that UnitedHealth was preoccupied with its $13 billion acquisition of pharmacy benefit manager Catamaran Corp.

Aetna and Humana ultimately remained vigilant in their negotiations, but they hit a wall on June 30. Mr. Broussard wanted $235 per share, which Mr. Bertolini rejected, the filing shows. Mr. Broussard, meanwhile, did not like a clause added by Aetna that would have allowed Aetna to back out of the deal if Humana received sanctions from the CMS before the deal closed. At that point, Messrs. Broussard and Bertolini, two of the most powerful health insurance CEOs in the country, “terminated discussions,” according to the disclosure.

Cigna, which was still being aggressively courted by Anthem, remained in the hunt for Humana. But it still couldn't match Aetna's $230 per share offer without changing the proportion of cash and stock. Humana's board decided to end negotiations with Cigna on July 2 due to the “uncertainty” of Cigna's proposal and raced back to Aetna, which agreed to restart the late-stage discussions.

Aetna and Humana agreed to the $230-per-share terms by nightfall July 2 and made the announcement official the next day.

Regulatory hurdles

However, despite the months of vigorous negotiations and due diligence, the Aetna-Humana marriage is far from official. The U.S. Justice Department is conducting its antitrust review to see if a combined company would have too much power in commercial insurance and Medicare markets. The same regulatory process is going on for Anthem and Cigna, which inked their deal late last month.

Humana will have to pay Aetna a $1.3 billion termination fee if the agreement goes sour because Humana didn't live up to its obligations, and Aetna will have to pay Humana $1.7 billion in the reverse scenario. Aetna will have to pay Humana a lesser $1 billion fee if the government puts the kibosh on the acquisition.

Humana's top brass have a lot at stake. Mr. Broussard's golden parachute is valued at $31.3 million if the deal is approved, with more than 75% of that total coming from accelerated stock and option awards. Mr. Kane, the CFO, would receive $12.9 million. Humana Chief Operating Officer Jim Murray is slated to collect $15.3 million.

Bob Herman writes for Modern Healthcare, a sister publication of Business Insurance.