Aetna announced plans on Friday to make the largest acquisition ever in the history of the insurance industry. Aetna, the third largest health insurer by revenue, intends to acquire the nation’s fourth largest health insurance company, Humana, for more than $37 billion in stock, cash, and debt. A combined Aetna-Humana would bypass Anthem to become the second largest insurer by revenue and total membership. The deal would also establish Aetna as the largest provider of Medicare Advantage plans, with over 4 million members.
The merger announcement comes at a time of unprecedented consolidation in the U.S. health insurance industry. Last month, Anthem announced that Cigna had rebuffed its $47 billion takeover offer and last week Centene Corp. announced that it will purchase Health Net for $6.3 billion. Aetna was itself recently the target of a takeover by the nation’s largest insurer, UnitedHealth Group, and Humana was also targeted by Anthem and Cigna.
The main reasons for the Aetna-Humana merger are diversification and increased clout. Humana derives the vast majority of its revenue from Medicare business, while Aetna is stronger in the commercial health space. A combined company will be more balanced and better positioned to profit from growth in either segment of the market. As a larger entity, the new company will also have more leverage in negotiations with health care providers.
More broadly, consolidation at the top of the insurance industry is being driven by the effects of the Affordable Care Act. The individual and employer mandates have increased demand for health insurance, and Medicare products should also see growth as the baby boomer generation reaches retirement. The Supreme Court’s recent decision to uphold ACA subsidies (and by extension the individual and employer mandates) provided industry executives with the certainty required to execute such colossal transactions.
The Aetna-Humana merger is subject to approval by both federal anti-trust regulators and Aetna’s shareholders. The deal is not expected to close until the second half of 2016 but it is expected to be approved by regulators, subject to divestments in some of the states where Humana and Aetna dominate the Medicare Advantage market. Aetna’s shareholders need to vote on the agreement because it will be funded in part by newly issued stock.
As the Wall Street Journal noted, the Aetna-Humana proposal is unusual in that it contains a $1.4 billion breakup fee that is payable to either the buyer or the seller in the event that one party walks away from the deal. This type of fee is typically only payable to a buyer as compensation for losing out on their acquisition target. The Journal speculated that the two-way nature of the clause may mean that Humana is concerned that Aetna will back out of the deal if UnitedHealth makes a more attractive takeover offer.
What’s more, Forbes’ Bruce Japsen noted that if the merger is consummated, the enlarged Aetna could end its pharmacy benefit management contract with CVS Health in 2019 and launch its own PBM. Such a move would follow UnitedHealth’s effort to dive deeper into the pharmacy business by buying Catamaran this spring. It would also make sense given the merger’s focus on Medicare and Medicaid business, and the growth of these segments due to the ACA’s Medicaid expansion and America’s aging population.