SUNDAY EDITION | If government kills Humana deal, would Louisville be better off?
As the Justice Department seeks to block Humana's sale to Aetna, WDRB.com business reporter Chris Otts looks at what it means for Louisville.
LOUISVILLE, Ky. (WDRB) -- Last year, the U.S. Department of Justice did Louisville a huge – albeit, inadvertent – favor by stepping in to block the takeover of the locally based GE appliance business by the Swedish company Electrolux.
Regulators’ opposition to the $3.3 billion deal allowed GE to pull out and find a different buyer.
The eventual sale to Haier Group of China preserved about 6,000 local manufacturing and white-collar jobs. Haier – unlike Electrolux – had no overlapping U.S. factories and offices to consolidate with GE Appliances.
Now the Justice Department may well stymie a merger that has even bigger implications for Louisville – the $37 billion sale of Louisville-based Humana Inc. to its bigger rival in the health insurance business, Connecticut-based Aetna.
But opinions vary as to whether the government might be doing Louisville another favor. In other words, would the city be better off remaining the headquarters of Humana, or becoming the headquarters of the biggest, fastest-growing division of a beefed-up Aetna?
“That’s a great question … The most important unknown is, what stays in Louisville under either scenario?” said retired University of Louisville economist Paul Coomes, a longtime observer of the local job market and author of a 2009 report on Humana’s economic impact.
Aetna CEO Mark Bertolini has said that Louisville is the only city to which the company is committed. Aetna has pledged to make Louisville the base for its government-sector business, a $64 billion behemoth that would exceed Humana’s total business currently.
“The prospects for job growth with the combined company are high,” said Kent Oyler, CEO of Greater Louisville Inc., which supports the merger. “…That’s where our enthusiasm comes from – if the transaction does go through, the fastest-growing part of (Aetna) is based here.”
But that scenario would still mean a loss – even if only symbolic – of the city’s biggest corporate headquarters, one whose annual revenue of $54 billion is more than all of the other 18 publicly traded companies in metro Louisville combined, according to data from Louisville Business First.
Aetna’s commitment to Louisville is no more specific than maintaining “a significant corporate presence” with the headquarters of the company’s Medicare, Medicaid and TRICARE military insurance business.
That could mean a lot of highly-paid executive positions are lost but the city gains call-center and back-office jobs, Coomes said.
“We could even see job growth, but likely payroll and wealth decrease,” he said. “If so, Louisville is certainly better with Humana as astandalone company.”
At the same time, there are questions about whether Humana can sustain the tremendous growth it’s enjoyed over the last decade in an environment in which the Affordable Care Act and other forces are prompting health insurers to bulk up.
Buoyed by its main business, Medicare, Humana’s revenue has nearly quadrupled since 2005. Its total market value of $26 billion has more than doubled in the last three years, according to FactSet.
That growth has meant big job gains in Humana’s hometown, where the company had 12,500 full-time-equivalent employees as of last count, up from 5,850 in 2006.
Larry Hayes, who was Kentucky’s top economic development official under former Gov. Steve Beshear, said Humana is so important to the state that its potential sale was one of the “top 5 things” he never wanted to read about in the news.
“When you look at what Humana symbolizes to us, it’s hard not to just close your eyes and hope everything stays the same forever,” Hayes said. “But we all know it won’t.”
Hayes, who was still on the job last year when the deal was announced, said his conversations with Aetna executives left him “absolutely no reason to think” the merger would lead to job losses in Louisville.
He declined to share the specifics of those conversations, but said: “I really do think it’s potentially a good thing for the community.”
Humana spokesman Tom Noland said it’s too early for any additional details on how the merger will affect Humana’s Louisville workforce.
“At this point, since the two companies are still independent competitors as the merger process proceeds, there is nothing additional beyond Aetna’s stated commitment to locate the combined company’s government businesses (Medicare, Medicaid and TRICARE) in Louisville,” he said in an email.
Court case likely to determine merger's fate
The $37 billion deal, announced a little over a year ago, was thrown into doubt on July 21, when the Justice Department filed suit to block the merger as well as the $54 billion tie-up of two other health insurers, Anthem and Cigna.
The government argues that shrinking the five main private health insurers to three would have devastating effects on prices paid by consumers and on doctors and hospital groups.
Unless the companies can reach a settlement with the Justice Department, a federal judge will decide whether either merger can go forward.
Court filings show that U.S. District John Bates will fast-track the Aetna-Humana case in an attempt to meet the companies’ Dec. 31 merger deadline, should they prevail.
Stock analysts generally see the Aetna-Humana deal as having a better chance of winning approval than Anthem-Cigna.
“It is our view that the government has a sizable burden of denial and will ultimately settle the case,” Stifel analyst Thomas Carroll said in a note to clients on Wednesday.
“We believe we’re going to get the deal done,” Aetna’s Bertolini told analysts on a conference call Tuesday, though he added that Aetna was obligated to consider a “Plan B” in case the merger collapses.
The biggest issue in the court case is the effect Humana and Aetna’s combination would have on competition for Medicare Advantage, a privately run version of the government’s healthcare program for seniors.
Seniors who opt into Medicare Advantage plans with companies like Aetna and Humana generally get lower out-of-pocket costs and more benefits, like dental and vision coverage, than under traditional Medicare.
For more than a decade now, the program has been Humana’s specialty and the main driver of its growth.
As part of the Affordable Care Act, the government has been cutting its payments to companies like Humana for Medicare Advantage plans. But the business remains strong because of Baby Boomer-generation seniors aging into Medicare, a growing portion of whom opt for the private version of the program, according to the Kaiser Family Foundation.
In an interview for the Courier-Journal in 2013, Humana CEO Bruce Broussard said that the company could manage the cuts to the program while continuing to grow the business.
He turned out to be correct. About 3.1 million seniors are covered under Humana Medicare Advantage plans, up from 2.2 million in 2012, according to Kaiser Family Foundation reports. The program brought Humana $35 billion in revenue in 2015, up from about $25 billion in 2012, according to company reports.
Humana and Aetna said in a court filing that the case will likely turn on one “overriding” question: whether traditional Medicare – still the choice of about 70 percent of seniors – is a “competitor” to Medicare Advantage.
The Justice Department argues it is not; while the companies say the government’s case “crumbles” if the judge adopts the opposite view.
Aging population could fuel more Humana growth
Even as a standalone company, Humana is well-positioned to keep growing its Medicare business, which already accounts for two-thirds of the company’s revenue and three-fourths of pre-tax income, according to Leerink Partners analyst Ana Gupte.
She wrote in a note to clients on July 22 that Humana has “compelling” growth ahead in the program as 11,000 Baby Boomers per day age into Medicare over the next decade, with a higher percentage choosing Medicare Advantage and Humana’s “industry-leading platform.”
In fact, its those demographic trends that make Humana so attractive to Aetna, whose main business is commercial insurance, not government programs like Medicare.
"From our vantage point, we think Medicare Advantage is one of the most attractive spaces to be in our industry," Aetna chief financial officer Shawn Guertin said at a health care conference last September.
Gupte also wrote that Humana will free-up resources by pulling back from the publicly subsidized individual plans sold through the exchanges set up under the Affordable Care Act, as Humana said it would do earlier this year.
The company will also boost its earnings next year with a significant expansion of its TRICARE military coverage business, for which Humana recently won a federal contract, she added.
Meanwhile Humana has less proportional debt than its competitors and could use the $1 billion break-up fee Aetna might have to fork over if the deal is not completed to repurchase more of its stock, which would boost its share price, Gupte wrote.
Humana’s Noland confirmed that the company’s strategy is to continue to grow its Medicare-related revenue and membership.
Oyler, who leads GLI, the metro chamber of commerce, noted that Humana has “reinvented itself” many times over its 55-year history, starting as a nursing home operator, then a hospital operator and finally a health insurer.
If the Aetna deal does not go through, “I would hope they end up being aggressive and acquire and grow and kind of resume the track that they were on before,” Oyler said.
Louisville Mayor Greg Fischer also touted the potential for local job growth with the Aetna takeover.
But he declined to say which scenario he’d prefer – Humana remaining Louisville’s biggest headquarters or becoming an even bigger division of Aetna.
“I want both,” Fischer said. “I want the new headquarters to be here and more jobs.”
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