The transaction is one of many afoot among large U.S. health insurers. It highlights the jockeying among companies for a position to capture growth in government business thanks to the Affordable Care Act, the rush of baby boomers enrolling in Medicare Advantage plans, and states' expansion of Medicaid managed care.
“These products are more of a commodity,” said Moody's Investors Service analyst Stephen Zaharuk. That means that price, already important, becomes a greater differentiator in the market. Regulation under the Affordable Care Act has left health plans with fewer ways to stand out in the market, he said. “Price is a very important component.” Greater scale could help lower costs and premiums through leverage with providers and lower administrative costs, he said.
The flurry of activity comes after the first year of the insurance expansion under the Affordable Care Act, which absorbed insurance companies' attention as they sought to grapple with new regulations and uncertainty over how markets would operate, said Joseph Marinucci, the lead analyst for Humana at Standard & Poor's. “The sense is they've gotten through this period of understanding what they're dealing with,” he said. Now organizations are mapping out strategies for three or five years.
Humana, with 2014 revenue of $48.5 billion, would gain from Aetna's more diversified business in the commercial insurance market, where the company has struggled to gain traction. For its part, Aetna, with 2014 revenue of $58 billion, would see sizable growth in its Medicare managed care business, which would grow to 4.4 million members with the addition of Humana's 3.2 million Medicare managed care enrollees.
Medicare Advantage is a growth market as baby boomers flood into Medicare, and it's attractive to insurers, analysts said.
The deal would give Aetna access to technology and ancillary services acquired and developed by Humana to manage the cost and quality of care for chronically ill Medicare beneficiaries. Humana has invested in care coordination programs and employs providers.
“It's not known about Humana, but we actually have a very strong Humana at Home platform, and today we employ about 10,000 nurses, and we actually assist people when they transition outside of the hospital to the home,” Humana CEO Bruce Broussard said in a Modern Healthcare interview earlier this year. “We actually spend a lot of time helping them coordinate care.”
Investors, however, are not sold on the deal, which may face challenges from antitrust authorities. Aetna announced plans to buy Humana before the July 4 holiday in a deal with a total value of about $37 billion before investors' cool reception lowered Aetna's stock price. The deal would create a company with operating revenue of $115 billion and 33 million enrollees in health plans.
Aetna may be required to pay Humana $1 billion to $1.69 billion if the deal fails to close, depending on the reason, according to regulatory filings.