(CFS) Aetna Announces Acquisition of PayFlex

In an attempt to solidify its Consumer Fund Services (CFS) business, Aetna Inc. (AET) has entered into an agreement to acquire Omaha, NE-based Payflex Holdings Inc. in a $202 million deal.

The acquisition, which will see light in the second half of the year, will not be accretive to Aetna’s 2011 and 2012 earnings. However, it is likely to offer attractive returns over the longer term. Founded in 1987, Payflex has around 423 employees presently.

PayFlex perfectly suits Aetna’s existing consumer-oriented product business, with the former’s business model focusing on web-based benefit administration for healthcare plan sponsors that offer consumer-based products like Health Savings Accounts (HSAs), Health Reimbursement Accounts (HRAs) and Flexible Spending Accounts (FSAs), and COBRA direct-billing services. Aetna is attracted towards PayFlex’s unique technology program called HealthHub, an integrated financial and wellness consumer portal.

Aetna intends to merge PayFlex with its exisiting CFS business after the acquisition. On addition of Payflex’s 1 million existing accounts, the number of accounts at Aetna’s CFS unit will amount to 2 million. Post acquisition, PayFlex can sell products on a standalone basis or in combination with Aetna’s products.

In April 2011, Aetna announced  its agreement to acquire New York City-based Prodigy Health Group (PHG), the nation’s largest third-party administrator of self-funded (ASO) health plans, with about 600,000 medical members and around 450,000 pharmacy members. Aetna agreed to pay approximately $600 million, which it expects to finance with available resources in hand. The transaction, which is expected to close in the second half of 2011, is projected to be neutral to 2011 earnings but modestly accretive to 2012 earnings.

Earlier during the year, Aetna acquired Medicity Inc., a health information exchange technology company aimed to reduce unnecessary health care costs.

Through its acquisition strategy, Aetna is gearing itself up for the changes that the Health Care Act will bring in when all of its provisions become applicable in 2014.

Aetna competes with other health insurers such as CIGNA Corp. (CI), WellPoint Inc. (WLP), and UnitedHealth Group Inc. (UNH). The stock of Aetna carries a Zacks Rank # 2, which translates into a short-term (1-3 months) ‘Buy’ rating. However, over the longer term, we rate the shares “Neutral”.

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