Aetna, the third-biggest U.S. health plan, agreed to buy Coventry Health Care for about $5.6 billion to increase its share of government business after President Obama's health-care overhaul.
Aetna will pay $42.08 a share for Bethesda, Md.-based Coventry, including $27.30 in cash and 0.3885 Aetna share, the companies said Monday. That represents a 20 percent premium over Coventry's closing price of $34.94 on Friday, which gave the company a market value of $4.68 billion. Including debt, the deal is valued at $7.3 billion.
Coventry is one of four companies hired by the state to manage care for the 560,000 Kentuckians enrolled in the federal-state health insurance program for the poor and disabled.
Coventry has given notice in recent months to many Kentucky hospitals and health-care providers that it intends to terminate or renegotiate contracts.
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The agreement presents "no real day-to-day issue for the Commonwealth," said Jill Midkiff, spokeswoman for the Cabinet for Health and Family Services.
Aetna spokeswoman Cynthia Michener said Kentucky is "a top state for membership with Coventry" and that customers will see no immediate impact. Aetna's Kentucky membership is approximately 90,000, Michener said.
Aetna expects to close the transaction in mid-2013, and it will then begin integrating the two companies in stages, Michener said.
Coventry spokeswoman Kristine Grow agreed Monday that "there will be no immediate changes to our business."
Nationally, the purchase will increase Aetna's share of business from government health plans including Medicare and Medicaid to more than 30 percent from 23 percent, the companies said. Coventry will add more than 5 million customers to Hartford, Conn.- based Aetna's 36.7 million members, including 1.5 million people on the drug plans of Medicare.
"It's a deal that almost had to happen," said Thomas Carroll, a Stifel Nicolaus & Co. analyst in Baltimore. "For Aetna to really compete effectively amongst the other large national managed-care companies, they have to do more in terms of gaining market share in the commercial business as well as getting a bigger foothold in Medicare and Medicaid."
The acquisition would be the largest by value for a health insurer in the past five years.
The deal will expand Aetna's reach among small businesses and customers who buy coverage on their own instead of through an employer, Mark Bertolini, Aetna's chief executive officer, said on a conference call with analysts Monday. Both markets are expected to expand under the health-care overhaul.
Aetna joins competitors WellPoint and Cigna in making acquisitions as the U.S. government expands medical coverage. WellPoint will buy Medicaid insurer Amerigroup for $4.9 billion, and Cigna bought Medicare specialist Healthspring for $3.8 billion.
Obama's health-care law seeks to add as many as 17 million patients under Medicaid, the insurance program for the poor, while individual states have increasingly turned to insurers to help them manage existing programs at lower costs. Medicare managed-care plans are among the fastest-growing products for health insurers.