What $37 Billion Aetna-Humana Deal Means

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Last week’s $37 billion merger agreement between Aetna and Humana will create a behemoth with $115 billion in annual revenues and 33.5 million members. A deal of this magnitude has wide-ranging affects across the national and local health care landscapes.

The deal brings together the third- and fourth-largest health insurers in the United States. It’s yet another sign of insurers joining together to become more powerful in the face of larger and larger health care providers. Let’s face it, both sides are going a bit M&A crazy these days. Like it or not, the Affordable Care Act has resulted in an oligopoly of sorts with health care dominated by fewer, larger players.

By agreeing to merge now, Aetna and Humana gained an important head-start with regard to federal anti-trust scrutiny. In fact, the Wall Street Journal reports that the company’s “own analysis found that an Aetna-Humana merger would increase by about 180 the number of U.S. counties where at least 75 percent of Medicare Advantage customers are in the hands of a single insurer.” That’s certain to get regulators’ attention.

“The more that this market consolidates, the more difficult it may become for other mergers to pass anti-trust review,” said Stuart H. Fine, associate professor and director of programs in healthcare management at Temple University’s Fox School of Business. That’s why it’s an advantage to merge early.

In the Philadelphia area, Independence Blue Cross is still king. While the Aetna-Humana merger “is likely to increase competition regionally, IBX is not being displaced as our region’s dominant insurer,” said Fine.

The merger will, however, give companies expanding to the region more options. A company in Humana’s hometown of Louisville, for example, can keep their plan in place when opening a Philadelphia office.

But will it help curb costs? The combined Aetna-Humana entity should create more competition and give the company “more contracting clout with provider networks,” said Fine. While that should lower premiums for patients, health care costs have proven to be a slippery thing to handle.

“The issue of competition in health care —  in economic terms — is ‘imperfect.’ People don’t know what they’re buying, and have trouble comparing and contrasting alternatives … ” said Fine. “Until purchasers and patients demand that companies release outcomes information, they’re going to be purchasing health care based on imperfect data.”

The Aetna-Humana deal could accelerate a possible deal between Cigna and Anthem. Last month, Cigna rejected a bid from Anthem in June worth $184 per share, according to Bloomberg. But now things are very different.

“Both Anthem and Cigna had held discussions to acquire Humana, people familiar with the matter said last month, asking not to be identified because the information was private,” Bloomberg reported. “Now that Humana is no longer an option, an Anthem-Cigna transaction can probably get done at about $190 to $195 a share.”

Fine says that a Cigna-Anthem merger would create a landscape where “just three companies would dominate the health insurance market nationally” with all three companies having annual revenues over $100 billion.