Humana Closes Arcadian Purchase

On Monday, Humana Inc. (HUM - Analyst Report) announced that it has completed the acquisition of Arcadian Management Services, a Medicare Advantage health maintenance organization. The financial and other terms of this deal were not divulged. The takeover is not expected to impact Humana’s earnings in 2012.

The deal, which was initially announced in August 2011, obtained anti-trust approval from the U.S. Department of Justice last week on the condition that Humana will divest Arcadian’s Medicare Advantage business in 51 counties in five states, namely, Arizona, Arkansas, Louisiana, Oklahoma and Texas. The divestitures are aimed at preventing monopoly in the states where the merging entities were the chief rivals before the acquisition, and hence, a union would leave virtually no competition. Humana plans to complete the divestitures by January 1, 2013.

California-based Arcadian is a privately-held organization that specializes in providing high-quality health care services to its members, most of whom dwell in small and medium-sized communities. The company provides Medicare Advantage coverage to about 62,600 people in 15 U.S. states.

The acquisition will boost Humana’s enrollment by only 50,000 members as a result of the members lost due to the mandatory divestitures. The company is already the fifth-largest health insurer in the U.S. on enrollment basis. The top two contenders of this list are WellPoint Inc. (WLP - Analyst Report) and UnitedHealth Group Inc. (UNH - Analyst Report)

Humana has a highly profitable Medicare business, which the company plans to expand further through acquisitions and joint ventures. The company completed the acquisition of California-based MD Care in January 2012, which boosted the number of its Medicare Advantage policyholders by almost 15,000.

Moreover, the Medicare Part D Prescription Drug Plan (PDP), launched in collaboration with Wal-Mart Stores in October 2010, expanded Humana’s individual Medicare stand-alone PDP membership by 52.1% to 2.54 million at the end of 2011, compared with 1.67 million at 2010 end.

Humana also forged an alliance with CNO Financial Group Inc.’s (CNO - Analyst Report) subsidiary - Bankers Life and Casualty Company - in September 2011, to offer its Medicare products. This collaboration as well as the Humana Walmart-PDP have enhanced Humana’s membership in prescription coverage plans and mail-order drug business.

Humana carries a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We also maintain a long-term ‘Neutral’ recommendation on the company.