In a late September review of health insurers, the web site Seeking Alpha was less than optimistic about the prospects for Cigna (NYSE:CI), pointing out that the Bloomfield, Conn.-based company is likely suffer from the margin pressures imposed by “Obamacare” unless it increased its pool of insured.
Evidently, Cigna’s management got the message. The company said Monday that it was acquiring HealthSpring (NYSE:HS) for $3.8 billion, or $55 a share — a 37% premium over HealthSpring’s closing price on Friday.
Furthermore, Cigna still seems to be shopping. David Cordani, CEO of the fifth-largest U.S. insurer by revenue, said the company is looking to beef up its participation in the individual policyholder market and will be looking at companies with established distribution networks and technology.
Cigna’s purchase of Franklin, Tenn.-based HealthSpring may unleash a tidal wave of acquisitions of smaller healthcare insurers, with larger rivals like Aetna (NYSE:AET) and Humana (NYSE:HUM) likely to join the hunt. Not only are some of the smaller industry targets growing faster than their potential suitors, but snapping them up allows the big players to increase revenue while controlling costs.
Investors might want to take a close look at some of the companies that are likely in the sights of the big healthcare insurers. According to a recent Barron’s piece, two of the prime prospects are Coventry Health Care (NYSE:CVH) and Health Net (NYSE:HNT). The financial publication added that both stocks could jump by as much as 50% on takeover potential.
If the Barron’s projection is anywhere close to being in the ballpark, there’s plenty of upside for investors; Coventry was up more than 7% on Monday to $32.12 while Health Net rose about the same amount to $27.36. Even absent a merger, Barron’s said Health Net is undervalued and is worth at least $30.
By acquiring HealthSpring, Cigna joins other managed-care heavyweights such as Humana (NYSE:HUM) and UnitedHealth Group (NYSE:UNH) that already have huge stakes in the growing market for senior-focused plans, which help offset a more stagnant market for younger Americans. HealthSpring has more than 1.1 million customers combined on Medicare Advantage and Medicare prescription drug plans and is growing sales faster than Cigna.
Because there are still a few large plans that want to grow their Medicare businesses, smaller insurers that specialize in Medicare-based plans also are getting increased investor attention as well. For instance, WellCare Health Plans (NYSE:WCG) jumped nearly 9% on Monday and Universal American (NYSE:UAM) rose 4%.
Even with acquisitions, the outlook for the big health care insurers still appears somewhat hazy given the potential for increased government regulation and the still-unknown impact of the Patient Protection and Affordable Care Act (PPACA), commonly referred to Obamacare by law’s skeptics. Some industry observers think PPACA is expected to have only a minor hit on the major insurers. They say the pricing pressures of the Medicare Advantage reimbursements and provisions are likely to be more than offset by the expansion of the pool of covered individuals and increased subsidies.
Until the dust clears, however, the best way to make money in the health insurance sector seems to be focusing on likely acquisition targets.