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Aetna's move to buy Humana may start trend

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After weeks of maneuvering, consolidation among major health insurers began Friday, with Aetna Inc. announcing that it will buy rival Humana Inc. for $37 billion.

If completed, the deal would create the second-largest U.S. health insurer by total membership and revenue, but further mergers and acquisitions are expected to create several behemoths in the sector.

All five of the largest health insurers have been rumored to be involved in various merger discussions over the past several weeks. The talk intensified after the Supreme Court's ruling last month upholding key aspects of the health care reform law brought more certainty to the market (see related story).

Under the terms of the deal, Humana shareholders will receive $125 and 0.8375 Aetna shares per Humana share. After the transaction is closed, which is expected to happen in the second half of 2016, Aetna shareholders will own about 74% of the combined company and Humana will own about 26%. The combined company will trade as Aetna, which will remain headquartered in Hartford, Connecticut.

Mark T. Bertolini, chairman and CEO of Aetna will head the combined company. The role of Bruce D. Broussard, president and CEO of Humana, has not been determined.

Neither executive was available for comment on Friday.

A key driver behind the deal is diversification. Aetna is strong in the commercial health insurance sector, and Humana has a large Medicare Advantage business. According to a joint-statement by the companies, the deal will create “a company serving the most seniors in the Medicare Advantage program and second-largest managed care company in the United States.”

The deal, which has been approved unanimously by both boards and is subject to regulatory approval, is expected to result in annual cost savings of $1.25 billion by 2018.

The combined entity also would have more clout with health care providers. “This combination will allow us to continue to invest in excellent service for our members and strengthen our partnerships with providers to deliver high-quality care at an affordable price,” Mr. Bertolini said in the statement.

The acquisition would create the second-largest health insurer in the U.S., behind Minnetonka, Minnesota-based UnitedHealth Group Inc. — leapfrogging Indianapolis-based Anthem Inc. — , with a projected $115 billion in 2015 revenue.

“Given the market environment that we're in, diversity of membership makes a lot of sense,” said Stephen Zaharuk, senior vice president at Moody's Investors Service Inc. in New York. “It's a changing marketplace and we don't necessarily know where the growth in business is going to be.”

On the negative side, he said, the proposed funding of the deal will add considerable debt to Aetna's balance sheet, “but they have put a very aggressive deleveraging plan into place.”

Commenting on the deal, Standard & Poor's Corp. said in a statement that the combined entity will benefit from improved size, scale and diversity, but “the transaction could be a drawn-out process, involving a potentially high degree of deal risk and regulatory scrutiny.”

The five largest health insurers — UnitedHealth, Anthem, Aetna, Humana and Cigna Corp. — have been circling each other in recent weeks in preparation for what is expected to be a major round of consolidations.

Aetna and Humana had been in several weeks of stop-start negotiations. Bloomfield, Connecticut-based Cigna rejected Anthem's $47 billion offer. UnitedHealth reportedly approached Aetna, and both Anthem and Cigna reportedly expressed an interest in Humana, before Aetna announced its offer.

In another deal last week, St. Louis-based Centene Corp. agreed to buy rival Woodlands Hills, California-based Health Net Inc. for $6.3 billion.

Experts say market conditions resulting from the federal health care reform law are driving the merger discussions.

Narrower profit margins, ongoing medical provider consolidation and rapidly growing government-sponsored enrollments have increased pressure on insurers to merge, analysts said.