HEALTH INSURER Aetna is to buy rival Coventry Health Care for $5.6 billion (€4.55 billion) to increase its share of the fast-growing, US government-backed Medicare and Medicaid programs.

The purchase, which will add more than 5 million members to Aetna’s ranks, comes just weeks after rival WellPoint struck a deal to buy Amerigroup Corp in a major expansion of its Medicaid business, administering the government’s health plan for the poor.

Bankers and investors see the wave of health insurer consolidation accelerating further as the United States moves to implement President Barack Obama’s healthcare overhaul.

The US health reform law aims to provide coverage for 16 million more Americans through privately run insurance exchanges in each state and will expand Medicaid eligibility for an additional 16 million people by raising limits on household income.

“The transaction boosts Aetna’s footprint in government programmes and adds scale to its commercial operations, which we view as strategically important ahead of the expected implementation of exchanges and health reform starting in 2014,” Barclays analysts said in a note to clients.

Under the deal, Aetna will pay $42.08 a share – $27.30 in cash and 0.3885 of its common shares. That is a 20.4 per cent premium over Coventry’s closing stock price of $34.94 on Friday.

Aetna chief executive officer Mark Bertolini estimated the combined company’s 2012 revenue at $50 billion. The deal, expected to close in mid-2013, will double Aetna’s Medicaid membership, he told analysts on a conference call.

The acquisition will help Aetna add nearly 4 million medical members and 1.5 million Medicare Part D members. Medicare Part D is a federal programme that reduces prescription costs for beneficiaries of the government plan for the elderly. In all, Aetna’s government business will account for more than 30 per cent of revenue after the deal, up from 23 per cent now.

Including the assumption of Coventry debt, the sale is valued at $7.3 billion, the companies say. Aetna plans to issue $2.5 billion in new debt and commercial paper to help finance the deal, but does not expect any impact on its credit ratings, according to chief financial officer Joseph Zubretsky. – (Reuters)