Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Is Aetna on the Verge of Collapse?

A lot of people are undoubtedly wondering if Aetna Inc. (NYSE: AET) is in trouble. Doubts about Aetna’s future are multiplying because of the company’s planned merger with CVS Health (NYSE: CVS).

Historically, executives do not attempt such drastic moves unless their stock options are in grave danger. Strangely enough, Aetna’s stock seems fine it was trading at $189.93 a share on July 19, 2018. Yet doubts remain because of the merger with the drugstore giant.

Skepticism about Aetna’s future is rife because the health insurance industry in America is in turmoil. Obamacare, failed Republican efforts at Obamacare repeal, popular anger at health insurance companies, sky-rocketing health insurance costs, and growing talk of singer-payer healthcare cloud Aetna’s future.

Is Aetna Making Money?

Interestingly enough, Aetna is making money but it is plagued by falling revenues.

Aetna’s year to year revenues fell by 5.56% 4th quarter 2017, 4.99% in 3rd quarter 2017, 2.7% in 2nd Quarter 2017, and 3.6% in 1st Quarter 2017. That’s four straight quarters of falling revenues. Okay revenues did grow by 1.12% in 1st Quarter 2018, but it’s still pretty scary.

Despite the revenue drop, Aetna is making a lot of money. It reported a gross profit of $4.388 billion, an operating income of $1.554 billion, and a net income of $1.209 billion on March 31, 2018. All that was achieved on a quarterly revenue of $15.335 which is very impressive.

More importantly, Aetna is generating a lot of cash. It reported a free cash flow of $3.242 billion and an operating cash flow of $3.341 billion for 1st Quarter 2018.

That translated into $10.396 billion cash and short-term investments on March 31, 2018. There was also $7.875 billion in cash and equivalents on the same day.

Cash is why CVS Wants Aetna

All that cash explains why CVS is so anxious to get its hands on Aetna. CVS reported $1.696 billion in cash and equivalents as recently as December 31, 2018.

CVS did have $42.023 billion in cash and equivalents on March 31, 2018, but it got that money by borrowing. CVS reported a financing free cash flow of $38.14 billion on March 31, 2018. Presumably, that is the money CVS borrowed to buy Aetna.

CVS management wants Aetna because their drugstore and prescription plan business is not generating that much float. Float is Warren Buffett’s nickname for a steady stream of cash that a company’s management can tap any time.

Insurance premiums, which customers have to pay each month to keep coverage, are a prime source of float. Buffett used float from insurance companies like GEICO to build Berkshire Hathaway (NYSE: BRK.B).

The CVS team is hoping to use Aetna’s float to expand or shore up their business. The hope is that the money from the health insurance premiums will cover the cost of drugstore operations.

A New Business Model for American Healthcare

Unfortunately, nobody knows if this would work because such a drugstore-insurance company hybrid has never been tried. Buffett and his friends Jeff Bezos and Jamie Dimon are trying to create such a hybrid to cut healthcare costs at Berkshire Hathaway (NYSE: BRK.A), Amazon (NASDAQ: AMZN), and JPMorgan Chase (NYSE: JPM).

Tellingly, their scheme like CVS’s is still on the drawing board. It looks as if CVS and Aetna are trying to create a new business model for American healthcare. The problem is that they don’t have all the details.

Such a business model as everybody from U.S. Senator Bernie Sanders (I-Vermont) to Bezos concedes is needed. Consumers, management, corporate executives, healthcare providers, and everybody else is completely dissatisfied with the present model.

Are CVS and Aetna Afraid of Single Payer Health Insurance

One obvious hope at CVS is to create a lower-cost healthcare model designed to limit demands for single-payer healthcare. Single-payer healthcare means total nationalization of health insurance.

Over one third of America’s health insurance system is already nationalized. The Kaiser Family Foundation estimated that 19% of Americans use Medicaid, 14% use Medicare, and 2% use other government health insurance programs. That means 35% of Americans get their health insurance from the government.

Medicaid is the state and federal health insurance program for the poor and Medicare is a federal health insurance system for senior citizens and the disabled. Other government health insurance systems include the Veterans Administration, Tricare for military families and the Indian Health Service for Native Americans.

Why Medicare for All Scares Aetna and CVS

An obvious fear for health insurance providers like Aetna is total nationalization of the system. That is the agenda of U.S. Senator Bernie Sanders (I-Vermont, often ranked as America’s most popular politician.

Sanders introduced legislation that would make private health insurance illegal. Sanders and many Democratic leaders are promoting single-payer under the euphemistic name “Medicare for All.”

U.S. Representative Jared Polis (D-Boulder) won a Democratic primary for Colorado governor with a ticket that emphasized his support of “Universal Healthcare.” Universal health care is another euphemism for single-payer health insurance.

How CVS and Aetna plan to Cash in on Medicare for All

An obvious conclusion here is that Aetna executives are afraid their business is about to get banned or nationalized. Therefore they are trying to merge with a company, that will not be CVS.

As an operator of drugstores and “Minute Clinics” CVS would make more money from Medicare for All. CVS would profit from Medicare for All because its customer base would be expanded dramatically.

More importantly, the taxpayer would be footing the bill which would guarantee a revenue stream. Overall profits might be lower, but constant cash flow might be higher and more stable.

An obvious savings from single-payer would be reduced bureaucracy. There might be just one insurer, Uncle Sam to deal with. Theoretically, that should reduce costs, but the US government has a long history making things more expensive and complicated than they should be.

A potential threat would be Congress designing a health-insurance system with several layers of bureaucracy. The reason for this would be to create lots of jobs for bureaucrats who would presumably vote Democrat.

Is Aetna a Value Investment?

Aetna is a pretty a lousy investment right now because its stock is overpriced. Aetna shares were trading at $189.94 on July 19, 2018. That was compared to the $66.04 for CVS on the same day.

Even with its dividend of 50¢ which is scheduled for payout on August 1, 2018, Aetna is a lousy stock. My advice is to stay away from Aetna and health-insurance in general until we see how single-payer and the merger shake out.

CVS Health is definitely a bargain right now, Aetna is terribly overpriced. Therefore, CVS is the obvious vale investment, with or without Aetna.