Health insurance giants Aetna and Humana will grow even larger with a new, $37 billion deal. Aetna will acquire Humana after paying approximately $230 per Humana share and the rest of that $37 billion in cash.
Just before the deal, Humana shares were $187.57, making the deal a 23% gain on share prices. Humana shareholders will receive $125 as well as .8375 Aetna shares per Humana share. The resultant company will cover over 33 million members and CNN projects annual revenue of around $115 billion, 56% of which would come from “government-sponsored programs such as Medicare.”
Before the deal can officially close, however, it must receive Federal approval. Officials at the Justice Department and Federal Trade Commission will review the deal in order to determine that it does not violate any antitrust regulations. The deal would make the new company America’s second largest insurer behind UnitedHealth, but The Wall Street Journal established that both CEOs are confident that the deal will be approved, “citing complimentary, rather than overlapping strengths—Aetna in commercial selling, and Humana in Medicare.” If the deal were blocked, Aetna would be required to pay
This merger is the largest in a streak of acquisitions in the health care industry, which includes Centene’s $7 billion purchase of HealthNet and CVS’ $2 billion acquisition of Target’s pharmaceutical business.
Many of these business decisions have been provoked by the newly implemented Affordable Care Act, which was recently upheld by the Supreme Court. Aetna’s chief executive Mark Bertolini explained to the New York Times that the deal would “allow Aetna and Humana to adapt to an environment where consumers increasingly choose their coverage on exchanges like the one created under the [Affordable Care Act] law, or similar online marketplaces offered by employers. The industry, which has traditionally provided insurance to employers, is shifting more to selling policies directly to individuals.”
Both CEOs claim that the deal would not only help the new company adapt to these shifting health care landscapes, but also increase diversity of business. Forbes cited diversification as “perhaps the best rationale for health insurers’ deals,” For example, approximately one-fifth of Medicare Advantage patients are currently under Humana. Michael Bernstein, a partner specializing in health care at Baird Capital’s U.S. private equity team, pointed out, “Medicare Advantage is a coveted space. To develop a similar scale in Medicare [for Aetna] would take a great deal of work and time, which would be bypassed” by making the deal with Humana.
Additionally, both companies hope that merging will increase efficiency and ultimately cut spending. Aetna’s Vice President and CFO Shawn M. Guertin stated, “The complementary nature of our two companies provides us with a significant synergy opportunity, furthering Aetna’s efforts to increase its operating efficiency. These cost efficiencies will support our efforts to drive costs out of the system and offer more affordable products.” Aetna expects to save $1.25 billion annually following the merger.
This final explanation of cost efficiency, however, proves unsatisfactory to some economists, such as Carnegie Mellon’s Martin Gaynor, who posed the question, “do they get any more scale economies from getting bigger?” in an interview with Forbes Contributor Dan Diamond. Diamonds suggests instead, a final reason for this merging of giants: “Amid health care’s merger mania, insurers are feeling psychological pressure to make deals of their own.”
It stands to be seen whether there actually is any efficiency to be gained, but for more information on the Aetna-Humana merger, see this NPR article.
