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In an effort to improve health care cost and quality, Aetna Inc. (NYSE:AET) announced last week the intention to acquire health information exchange technology provider – Medicity Inc.

The acquisition of Medicity based in Salt Lake City, is expected to cost $500 million to Aetna. The purchase will be funded via in house resources and will not be accretive to 2011 earnings. Medicity connects 760 hospitals and 125,000 physicians.

The acquisition of Medicity will help Aetna, the third largest health insurer (based on enrolment) to diversify its operations beyond health benefits. The company is preparing itself to benefit from the $25.8 billion subsidy for investing in health information technology effective 2011, which was passed by the United States Congress in February 2009.

In a similar transaction during August 2010, Aetna’s peer UnitedHealth Group Inc., (NYSE:UNH) announced the acquisition of Axolotl Corp., a health data network based in San Jose, California. We expect similar moves over the coming months from other carriers as they gear up to improve health care efficacy.

Following the announcement of the acquisition, the rating agency also reviewed Aetna’s issuer credit and debt ratings and kept them unchanged. The rating agency acknowledges the company’s move in diversifying its business and putting extra cash to work. The deal is expected to close early next year in January.

During the recently concluded third quarter, Aetna announced operating earnings of 75 cents per share, a couple of penny above the Zacks Consensus Estimate. The results indicate that Aetna has benefited from lower medical utilization and favorable reserve development in the current quarter.

Aetna carries a Zacks #3 Rank, which translates into a “Hold” rating over the short term (1-3 months). Also, over the longer term (6+ months) we rate the company “Neutral”.

Source: Aetna to Acquire Medicity for $500 Million