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One health insurer mega-merger could tip the scales

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A deal struck between any of the five major U.S. health insurers could cause a domino effect of merger and acquisition activity in the managed care sector, according to Fitch Ratings Inc.

One “mega M&A deal” could prompt other competing health insurance firms to respond similarly “to shore up competitive disadvantages in scale and product lines,” Chicago-based Fitch said in a report released Tuesday.

“Basically, it would just be a competitive response,” Mark Rouck, a senior director at Fitch, said Wednesday, adding that if a health insurer didn't respond to a competitor's merger or acquisition, that firm would be “competitively disadvantaged” when it comes to size and diversity of products.

Rumors of potential M&A activity have heated up in recent weeks. Most recently, UnitedHealth Group Inc. has reportedly expressed interest in acquiring rival insurer Aetna Inc., the Wall Street Journal reported Monday.

Similarly, Anthem Inc. and Cigna Corp. have been in discussions about a possible takeover. The Wall Street Journal in a separate report on Monday said Cigna recently rejected purchase offers from Anthem Inc. that valued the firm at $45 billion.

Meanwhile, Aetna, Cigna and Anthem all have expressed interest in purchasing Humana Inc.

According to Fitch, reduced health insurer membership margins, worsened by the U.S. government's “challenging fiscal condition” and employers' push to reduce health care costs, have helped spur potential M&A activity.

Any deal would “help from an expense efficiency standpoint” and enable health insurers to invest in technology, said Mr. Rouck.

Let's make a deal

Vishnu Lekraj, a senior equity analyst with Chicago-based Morningstar Inc., said Wednesday a domino effect could “definitely be a scenario,” though it depends on which firms make a deal.

For example, if one firm were to acquire a Medicare Advantage-centric insurer, another may have to buy a firm that is commercial-centric, Mr. Lekraj said.

“The bigger you are, the better off you are. And the more diversified you are, the better off you are,” he said.

Any M&A deals would most likely give companies bargaining power with providers and would “lead to more efficiency and better overall long-term health care cost trends for employers,” Mr. Lekraj said.

According to Fitch's Mr. Rouck, health insurer consolidation in the long term is likely to happen, though it's unclear if a deal will be made in the short term. Low interest rates and the assumption that rates would soon increase could prompt a deal sooner, he said.