Humana Considers Sale of Company

Health insurer Humana Inc. is considering selling the company, a move that could trigger a widely anticipated wave of consolidation in the industry.

Humana has received indications of takeover interest and is working with advisers at Goldman Sachs Group Inc., according to people familiar with the matter. Aetna Inc. and Cigna Corp. are among possible bidders for the company, some of the people said.

It's possible there will be no deal for the company, which had a market value Friday afternoon of about $27 billion.

Write to Liz Hoffman at liz.hoffman@wsj.com, Dana Mattioli at dana.mattioli@wsj.com and Dana Cimilluca at dana.cimilluca@wsj.com

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Health insurer Humana Inc. is exploring a possible sale of the company, a move that could trigger a round of mergers in an industry grappling with challenges and opportunities the federal health-care overhaul has created.

Faced with pressure to cut costs and find ways to profit from the potential new customers the Affordable Care Act is generating, the big health insurers have long been expected by analysts to turn to mergers that will give them the heft to better compete as the industry evolves.

Humana, based in Louisville, Ky., gets the bulk of its revenue from its business administering the private version of the federal Medicare program. The company is seen as a prize because of its powerful Medicare franchise, which is growing rapidly as baby boomers age into eligibility and opt for these plans, known as Medicare Advantage.

Humana has received indications of takeover interest and is working with advisers at Goldman Sachs Group Inc. on the possible sale, according to people familiar with the matter. Aetna Inc. and Cigna Corp. are among those that have held preliminary discussions with Humana, some of the people said.

It is possible there will be no deal for the company, which had a market value Friday afternoon of nearly $27 billion before The Wall Street Journal reported news of the talks and the shares surged 20% to close at $214.65, an all-time high.

Like those of other health insurers, Humana's shares had already done well lately. They had risen 42% over the past year before the latest news, with much of the surge tied to speculation about a potential deal, as well as optimism about the Medicare business's growth prospects.

"We view this step as a trigger event in a managed-care industry overdue for consolidation," analysts at Leerink Partners LLC wrote in a research note Friday afternoon. "We expect the next year will see multiple strategic actions among the major players."

The industry is facing pressure to squeeze out costs, and mergers could help. An ever-larger share of the companies' business is tied to government programs and the health law's exchanges, where individuals--who tend to be more cost-conscious--buy their own plans. Getting bigger could also give insurers increased leverage in negotiating rates with hospitals, many of which have expanded through their own mergers.

Humana is one of the five biggest players in an industry that bankers and analysts have long considered ripe for consolidation. Besides Aetna and Cigna, the other major insurers are UnitedHealth Group Inc., the largest by revenue, and Anthem Inc., while a roster of smaller companies are also seen as likely to be swept up in deals.

Investors broadly cheered the news, as shares of Humana's closest rivals rose, too. Aetna shares rose 1.4% Friday, while Cigna jumped 3.7%, UnitedHealth increased 0.5% and Anthem added 2.2%.

A takeover of Humana, should one ensue, could lead to more health-insurance consolidation, which has been relatively quiet since a spate of tie-ups announced in 2011 and 2012 that included Aetna's $5.7 billion purchase of Coventry Health Care Inc. and Cigna's $3.8 billion acquisition of HealthSpring Inc. The big deals then were aimed at building scale in Medicare and Medicaid, which is geared toward lower-income patients.

"While impossible to predict timing, there is a consistent theme of consolidation being openly discussed by a number of management teams in the sector," J.P. Morgan analysts wrote in a recent research note.

Humana posted pretax income of about $1.1 billion on revenue of $48.5 billion last year. In the first quarter, its membership rose to 14.2 million customers and revenue jumped 18%, though its earnings fell short of Wall Street expectations.

Humana has missed analysts' earnings projections for the past three quarters. It has said it is facing challenges with its business on the health law's exchanges, and warned of a potential uptick in hospital usage by its Medicare members. It also has disclosed a Justice Department probe into how Medicare Advantage insurers score the health risks of their members.

But Humana's stock has been buoyed by the perceived value of its Medicare franchise as well as by the speculation that it would be involved in a deal.

Humana last year hired a former Goldman banker as its finance chief, a move widely seen as a signal that the company was interested in pursuing deals.

In March, the company agreed to sell its Concentra unit, which provides urgent care and physical-therapy services, to a joint venture of Select Medical Holdings Corp. and private-equity firm Welsh Carson Anderson Stowe for about $1.1 billion.

After UnitedHealth, Humana is the second-biggest purveyor of Medicare Advantage plans, with 3.19 million beneficiaries, or approximately 18% of the total enrollment in the private plans, according to a tally by Wells Fargo Securities.

Aetna has been viewed by some industry analysts as the most likely acquirer of Humana, and executives at Aetna have spoken publicly about their interest in acquisitions. Cigna and Anthem also have been linked to Humana, though some industry experts believe an Anthem tie-up could face regulatory challenges over Humana's commercial business, which overlaps with Anthem's in markets such as Kentucky.

A UnitedHealth deal has been seen as less likely because of the potential size of their combined Medicare businesses, which could draw antitrust pushback.

The impact of a Humana takeover could be keenly felt in Louisville, where the insurer and former hospital operator has long been a big employer. Its 26-story headquarters building, designed by well-known architect Michael Graves, is a signature presence in the city's center.

Corrections & Amplifications

An earlier version incorrectly reported Humana's 2014 revenue. It should be $48.5 billion, not $34 billion.

Write to Liz Hoffman at liz.hoffman@wsj.com, Dana Mattioli at dana.mattioli@wsj.com, Dana Cimilluca at dana.cimilluca@wsj.com and Anna Wilde Mathews at anna.mathews@wsj.com