Aetna to buy Humana for $37 B in largest insurance deal

Health insurer Aetna Inc. on Friday said it would buy smaller rival Humana Inc. for about $37 billion in cash and stock, in the largest ever deal in the insurance industry.

The combination will push Aetna close to Anthem Inc.’s No. 2 insurer spot by membership, and would nearly triple Aetna’s Medicare Advantage business.

The deal will face antitrust scrutiny but if it goes through it would dwarf the previous largest insurance deal announced just this week, where Swiss property and casualty giant ACE Ltd. announced it was buying Chubb Corp. for $28 billion. It would also dwarf Anthem Inc.’s purchase of WellPoint in 2004 for $16.6 billion.

Analysts have said that M&A activity in the healthcare sector had been waiting for last week’s Supreme Court ruling on Obamacare, which upheld key subsidies that underpin the reform and thus gave more certainty to healthcare insurers.

The bigger the insurer, the more power it has negotiating prices and improving its doctor networks.

Anthem has offered to buy Cigna Corp. to create the largest insurer in the country, toppling UnitedHealth Group Inc.

Media reports have also said UnitedHealth could be eyeing Cigna and Aetna. On Thursday, Centene Corp. said it would buy smaller rival Health Net Inc for $6.3 billion.

Antitrust authorities, who were aggressive in their review of the failed deal between Comcast and Time Warner Cable , are expected to scrutinize how the combination of insurers will affect competition for each line of insurance: Medicare, Medicaid for the poor, individual insurance, commercial insurance for small and large businesses and the large employer business.

Aetna and Humana are in nine of the same states in Medicare Advantage. Combined, they would have market share of 88 percent in Kansas, 80 percent in West Virginia, 58 percent in Iowa and 51 per- cent in Missouri.

Wall Street analysts and some antitrust experts have said they expect the combination will be approved, although regulators may ask for some divestitures.

Others have said it is unclear that this group of regulators will stick to the usual review playbook for such a large deal and may add other restrictions.

The Justice Department, which reviews insurance mergers, will scrutinize deals city-by-city to see if the combination would have a monopoly in any metropolitan area, said Andre Barlow, a veteran of the department who is now at Washington law firm Doyle, Barlow and Mazard PLLC.

Aetna said the combined company is projected to have over 33 million medical members, based on memberships as of March 31. Operating revenue is expected to be about $115 billion this year, with approximately 56 percent from government-sponsored programs including Medicare and Medicaid.

Last week, the US Supreme Court upheld subsidies for individuals under President Barack Obama’s signature healthcare law, keeping a large chunk of patients intact under the Medicare and Medicaid programs.

Insurers have said subsidies are key to bringing in new customers and the ruling has removed uncertainty for insurers looking for acquisitions. It could also spur more deal making in the health insurance sector, which has already seen a blitz of merger activity this year.

US Senate Majority Leader Mitch McConnell, of Kentucky, praised Humana’s presence in his home state but also noted the role of the healthcare law in the merger.

“This morning’s announcement, as I predicted during the debate five years ago, is the inevitable result of Obamacare’s push toward consolidation as doctors, hospitals, and insurers merge in response to an ever-growing government,” the Republican said in a statement. –