Louisville, Ky.-based Humana Inc. has long used M&A, well, surgically. Founded as a nursing-home operator in Louisville in 1961, Humana went on to acquire hospitals, becoming one of the pioneers of for-profit hospitals. By the early 1980s it found itself the world's largest hospital company. By 1984, as healthcare costs mounted, the company

began to build a health insurance business. Less than a decade later, Humana took a radical strategic turn and spun off its hospitals into a separate company, which it then sold to Nashville-based HCA Inc.

Today, 51-year-old Humana is one of the largest health and supplemental benefits businesses in the U.S., with 11.1 million members in medical-benefit plans, as well as some 7.3 million members enrolled in specialty products as of December, according to its latest 10-K. It commands about 5.4% of the health and medical insurance market in the U.S., as measured by revenue, and ranks third by market share, competing with giants such as UnitedHealth Group Inc., WellPoint Inc., Nos. 1 and 2, respectively, and Aetna Inc., No. 4.

Humana generated $36.8 billion in revenue for 2011, up 9.6% from $33.5 billion in 2010, and has a market capitalization of more than $14 billion.

Humana is currently in the midst of another vigorous acquisition run, racking up four acquisitions in 2011, and one in late 2010, after sitting out the recession and financial crisis while it attempted to gauge the effects of major regulatory shifts, from federal government healthcare reforms to a provision in President Obama's economic stimulus package.

The company has moved to bulk up in healthcare technology, specifically infomedics, that is, the management of medical records and health information. A key aspect of the Obama administration's healthcare overhaul is a mandate requiring providers to move from paper patient records to electronic ones by 2014.

This law, the Health Information Technology for Economic and Clinical Health Act, or Hitech Act, signed by the president in February 2009, was part post-crisis stimulus as well as an attempt to lower costs. The law is distributing some $19 billion to healthcare constituents that adopt new technologies, and has made infomedics attractive to large managed-care organizations such as Humana; MCOs offer coordinated and, in theory, cost-effective health coverage through a network of physicians and hospitals for a monthly fee.

Other regulatory changes flow from the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, which Obama signed into law in March 2010. To ensure premiums are spent primarily on healthcare, the law generally requires that at least 85% of all premium dollars collected by insurance companies for large employer plans are spent on healthcare services and healthcare quality improvement. Also, the amount of money paid to insurers through Medicare Advantage is being tied to performance.

Humana is also doing deals to boost Medicare Advantage enrollment numbers to cope with changes in reimbursement rates and to increase its data-handling capacity. Generally, it's trying to capture a major share of an expanding consumer market, especially "baby boomer age-ins," that is, members of the post-World War II generation who have begun to turn 65 and are thus eligible for Medicare. "The acquisitions have been, more often than not, targeted in Medicare Advantage, and that is the biggest part of their business. So they're in that instance augmenting their Medicare Advantage footprint," says Jefferies & Co. analyst David Windley.

Medicare Advantage is a fee-for-service plan offered by private insurers. Medicare pays a set amount of money to a private insurance company per Medicare-eligible patient to provide coverage; the insurer must provide enough cost-effective care to make a profit on the fee.

Recent comments by Humana CEO and chairman Mike McCallister at an industry conference suggest Humana is not yet finished. "We've been busy. There's a number of things, I think, [that] are going to be critical long term to succeeding in this business, and I think one of them is going to be the ability to take advantage of the incredible mountain of data that companies like ours sit on, but have not made very actionable historically. That's still in front of us, that opportunity is there," said McCallister at the J.P. Morgan Healthcare Conference in San Francisco Jan. 10.

Humana returned to dealmaking in November 2010 when it bought Addison, Texas-based work injury clinic operator and drug-screening business Concentra Inc., which provides drug screening and care for workplace injuries, from private equity shop Welsh, Carson, Anderson & Stowe for $790 million. It made its next move on Aug. 25, when it acquired Oakland, Calif.-based Arcadian Management Services Inc., a Medicare Advantage health maintenance organization provider active in 15 states with 64,000 members, for undisclosed terms. On Sept. 27, it grabbed MD Care Inc. of Long Beach, Calif., another Medicare Advantage HMO, for undisclosed terms. MD Care, with about $155 million in revenue in 2010, serves 15,000 members in four Southern California counties: Los Angeles, Orange, San Bernardino and Riverside.

Two more add-ons followed in November and December, though these were more specialized. The company bagged SeniorBridge Family Cos., a New York-based chronic-care provider with about $72 million in sales, on Nov. 29. On Dec. 7 it acquired San Diego-based healthcare data analytics company Anvita Inc., which helps health plans, pharmacy benefit managers, personal health record companies and other entities handle health data, particularly with medical profiles.

These acquisitions had three major related goals, sources say. They helped Humana solidify its already strong position in Medicare Advantage, boost its managed-care capabilities and improve operational efficiencies to gain better profit margins in an increasingly cost-sensitive environment.

The backdrop of all of this is the well-documented aging of baby boomers. The boomer population is estimated at some 77.3 million people, according to the U.S. Census Bureau. The number eligible for Medicare will nearly double, from 46 million at the end of 2010 to about 80 million by the time the last boomers turn 65 in 2030.

"I would say that the strategy of the company, despite the pretty picture, is to get everything relative to seniors correct and be prepared for the tripling of the individual health insurance market in this country as a result of health reform," said McCallister at the conference. "These two things are predictable; the clock is driving the demographics on the senior side."

Two aspects of recent healthcare reform also seem to be fueling deals for managed-care operators such as Humana: reimbursement rates for Medicare and accounting of administrative expenses.

"A regulatory and legislative driver for the market is that Medicare, which is the country's largest payer, [is] reducing its reimbursement rates to healthcare providers and professionals and insurance companies," says healthcare technology banker Jonathan Krieger, a managing director at Berkery, Noyes & Co. LLC in New York.

Medicare reimbursements are expected to fall under new regulations because doctors are now mostly paid based on the number of clinical outcomes or procedures, rather than by volume of services that they perform, Krieger says. The former meant that patients might be subjected to a barrage of procedures when stepping into a doctor's office from providers incentivized to capture as many reimbursments as possible. The new rules are meant to rein in costs by reducing procedures performed. "There is a fundamental shift in how healthcare will be paid for. Medicare, the largest payer of healthcare services, is establishing new care models and will be paying insurers and providers based on the value of the care they deliver as opposed to the volume. Fee-for-service programs are being replaced with value-based reimbursement models."

Meanwhile, according to Krieger and others, federal reforms have mandated an 80%-to-85% medical loss ratio, meaning that insurers must spend at least 80% to 85% of the premiums that they take in on healthcare procedures. As a result, they only have 15% to 20% of the money to support administrative expenses. "Their margins are getting squeezed, based on federal mandates," says Krieger. "[So] they need to go out and manage the care of their Medicare beneficiaries."

In addition, the cost of medical procedures themselves continues to rise. According to the Centers for Medicare & Medicaid Services, U.S. health expenditures are forecast to grow at an average annual rate of 6.3%, reaching $3.8 trillion by 2016.

This was one reason Humana sought SeniorBridge and Anvita. The company was looking to build up its managed-care and data-handling capacities, scale up for increased Medicare penetration and capture an ever-ballooning consumer market to offset the squeeze on profits.

Humana's rivals have made similar moves for similar reasons. Comparable strategic transactions include WellPoint's acquisition of CareMore Medical Enterprises Inc. for an estimated $800 million from CCMP Capital Advisors LLC in June; the November purchase of Baltimore-based XLHealth Corp. by UnitedHealth from private equity firm MatlinPatterson Global Advisers LLC and GS Capital Partners LP, the investment arm of Goldman, Sachs & Co., for an estimated $1.1 billion; and Universal American Corp.'s purchase of specialty healthcare services provider APS Healthcare Inc. from funds affiliated with Chicago buyout shop GTCR LLC for $227.5 million on Jan. 11.

"I think all of those are a positioning in this way," says Jefferies' Windley, referring again to the need for large strategics to expand their Medicare consumer reach and data-handling capability in response to pressure on their margins. "[There's] a thread which you can weave through all that."

Adds IbisWorld Inc. analyst Sophia Snyder: "These companies have had rising administrative costs; technology development [in infomedics] hasn't really kept pace with other [parts of the] healthcare industry. These companies are going to look for ways to improve their IT to constrain costs." Snyder anticipates a surge in infomedics purchases by Humana and its competitors.

Valuation multiples for the kinds of businesses Humana has bought and may be interested in vary widely, according to Krieger. Revenue multiples on targets can range anywhere from 1 to 5 times, Ebitda multiples anywhere from 8 to 15 times; sales processes take about six to eight months.

Valuations are based on where exactly a particular company fits within the healthcare continuum, what its value proposition is and how quickly a particular business is expanding.

For a long-term-care provider such as SeniorBridge, factors that aid in the prediction of future revenue are profit margins, current size and predicted growth, as well as the structure and experience of the management team. On the other hand, a technology company such as Anvita is valued according to how well current products are doing, how long the success is expected to last, what stages products are in, how many patents the company holds and how long until the next product will be launched.

"Since 1993 we have been a standalone health benefits company [that's] now morphing [again]," says Humana spokesman Tom Noland. "There has also been an incredible continuity of leadership responsible for our longevity."

But Humana is no stranger to aggressive dealmaking. Long before the financial crisis, it tackled a number of sizable purchases, including the $650 million acquisition of Green Bay, Wis.-based Emphesys Financial Group Inc. in August 1995; the $408 million deal for Miami-based CarePlus Health Plans Inc. in December 2004; and the June 2007 purchase of Roswell, Ga., supplemental benefits company CompBenefits Corp. from TA Associates Inc.; and others for $360 million in cash and assumed debt.

Humana's last significant deal in that period came a month or so before Lehman Brothers Holdings Inc. collapsed: the August 2008 purchase of health benefits firm PHP Cos. from Knoxville, Tenn.-based Covenant Health for about $245 million in cash, tripling its Medicare Advantage members in Tennessee.

"If you go back to 2009 and early 2010, you can very easily say that they didn't acquire anything, and a lot of people didn't acquire anything because you were still trying to figure out what impact healthcare reform [was going to] have," says Windley. "You didn't want to buy something and pay a multiple that was inappropriate once you figured out that maybe reform was negative for the company's business. Everybody stepped to the sidelines a little bit because of the uncertainty."

This break offered one big advantage: Humana accumulated cash that enabled it to go hunting once some certainty returned.

Recognizing the opportunity and clearly signaling that it planned to remain an active dealmaker, Humana hired Paul Kusserow as chief strategy officer in February 2009 to oversee corporate strategy, M&A and venture investing, with a direct report to McCallister (see page 31).

"[Humana's] balance sheet is very strong. They've been less active with share repurchases over the last several years. This allows them to build up quite a bit of capital on the balance sheet. I guess you could look at it as a loaded gun in terms of their ability to do transactions," says Morningstar Inc. analyst Matthew Coffina.

Even over the past nine months, Humana's cash balance has swelled. Its cash holdings rose $2.3 billion, to $4 billion, for the nine months ended Sept. 30. It reported net income of $1.2 billion on revenue of $27.7 billion for the first three quarters of 2011, as compared with net income of $992 million on $25.3 billion in revenue for the same period in 2010.

Coffina adds that Humana's debt-to-capital ratio was 17.5% at the end of its most recent quarter, compared with the 25% to 35% that's more typical for managed-care organizations.

Humana's stock has risen almost 57% over the past year alone, closing at $86.44 per share on March 7.

Apparently, this M&A spree isn't over. Humana will continue to search for acquisitions, particularly in infomedics. It won't be alone. Insurers, for instance, are likely to push further into the $65 billion clinical-lab market, says Berkery Noyes' Krieger.

Humana, for its part, has already made inroads into this area with Anvita. The company is also looking to move deeper into the dual-eligibles market, that is, people eligible for both the Medicare and Medicaid programs. This segment is expected to grow because of the age-in process and the still-weak economy, which, by cutting incomes, makes more people eligible for Medicaid. New reforms have also tweaked Medicaid eligibility levels, expanding the program.

"There is a pending opportunity for a lot of these managed-care plans that operate in the government space in the transition of [this patient] population," says Windley. "Because they are both poor and elderly, they need a lot of care, and so the dollars spent on those people are quite large today. That population has a lot of low-hanging fruit. The movement of dual eligibles into managed care is a significant revenue opportunity."

Windley notes that this was a likely factor behind Humana's decision to purchase SeniorBridge.

Coffina doesn't discount the possibility of a larger merger with one of the big insurers by Humana down the road, say WellPoint or Aetna, both of which have a larger market cap -- WellPoint by 58.4%, Aetna by 16.5%. In August 1998, Humana actually attempted to merge with UnitedHealthcare, but the deal fell apart.

Scale remains important in managed care because it allows providers to negotiate favorable discounts with healthcare providers, particularly for commercial plans where Humana still can grow. Size also allows insurers to leverage administrative costs via synergies.

For half a century, Humana has been an aggressive dealmaker. And that doesn't seem likely to change, particularly as healthcare in the U.S. continues to evolve. As Humana's McCallister said: "We keep looking for opportunities around the country to improve our geography. If I could do a dozen of these a week, I would."