Health Net May Be a Target in Industry Consolidation

More buyouts of health insurance companies are expected by year’s end, and Health Net Inc. is emerging as a likely acquisition target.

Shares of the nation’s largest health insurers are up sharply this year, but none more than those of the Woodland Hills-based insurer, which have soared 64%. Health Net shares rose 2.8% on Friday to an all-time high of $47.32, valuing the company at $5.36 billion.

The most likely buyers, says Banc of America Securities analyst Joseph D. France, are Aetna Inc. and Cigna Corp.

An Aetna purchase of Health Net would give the Hartford, Conn.-based insurance giant a major presence in California, where Health Net has 2.3 million members, France noted in a late August report that outlined possible buyout scenarios. Health Net would get access to Aetna’s better provider networks in the Northeast, where high hospital costs have hurt it.

An acquisition by Philadelphia-based Cigna, which is attempting a turnaround by designing new products, selling non-core businesses and cutting staff, also would “make sense,” France said.

France cautioned in his report that he had no “exclusive insight” into potential deals and was not “trying to play matchmaker or put companies into play.”

One of the other scenarios he discussed has already been realized: this week’s proposed purchase of WellChoice Inc. by WellPoint Inc., which became the nation’s largest health insurer last year when it was formed by the acquisition of WellPoint Health Networks Inc. by Indianapolis-based Anthem Inc.

A spokesman for Banc of America said France could not comment on his report because the bank is an advisor to WellPoint in the WellChoice deal.

France -- unlike many on Wall Street -- is not bullish on health insurer acquisitions.

“Acquisitions tend to benefit shareholders of the acquired companies, but while they usually provide the acquirer some synergies, they frequently destroy value,” he wrote.

Aetna executives declined to comment, and calls to Cigna were not returned. Health Net spokesman David Olsen acknowledges that there have been “persistent rumors all year” that the firm is a takeover target, but he would not comment more specifically. “We’ve got our nose to the grindstone,” he said.

France is not alone in his assessment of the industry.

“We’re in for a sustained period of consolidation,” said Edmund E. Kroll, a healthcare analyst with SG Cowen Securities in New York. “It’s virtually an irreversible trend. And when we come out, there will be just a few large HMO players nationally.”

Kroll likens the consolidation to one that occurred in the banking industry in the late 1990s.

With new enrollees harder to come by and premium growth rates beginning to slow, insurers are looking to increase profitability through combinations that can help them reduce overhead costs, increase cross-marketing and gain members.

In addition to WellPoint’s proposed acquisition of WellChoice, Cypress-based PacifiCare Health Systems Inc. has agreed to be acquired by Minnetonka, Minn.-based UnitedHealth Group Inc., America’s second-largest insurer, for $8.1 billion.

Wall Street generally has approved of such combinations, saying that they lower operating costs and raise profits. Consumer advocates, however, complain that the acquisitions thwart competition, and physicians say they don’t result in better care or lower premiums.

Last year’s purchase of Thousand Oaks-based WellPoint Health by Anthem drew strong criticism for its compensation packages to executives and concern that acquisition costs were being paid by hikes in monthly premiums, but the deal was eventually approved.

On Friday, state Controller Steve Westly joined state Treasurer Phil Angelides, a fellow gubernatorial aspirant, in opposing the UnitedHealth-PacifiCare deal, which awaits regulatory and shareholder approval.

That didn’t damp investor enthusiasm for the deal. UnitedHealth shares gained 48 cents to $56.20; PacifiCare rose 30 cents to $79.78.

Cigna, whose shares are up 44% this year, added 42 cents to $117.86. Aetna rose $1.44 to $86.14. Its shares are up 38% this year.