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(Reuters) — U.S. health insurer Centene Corp. will buy smaller rival Health Net Inc. for $6.3 billion, underscoring the health care industry’s rush to bulk up to negotiate better prices with suppliers and hospitals, and attract new customers.
Health Net’s shares touched a record high of $76.67 on Thursday, but stayed shy of Centene’s offer of $78.57, which is at a 21% premium. Centene shares were down 3% at $78.42.
The deal comes a week after the U.S. 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.
Aetna Inc., the third largest insurer is looking to buy smaller rival Humana Inc. No. 2 Anthem Inc. 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.
Health insurers are not alone in trying to beef up.
Drugmakers, retailers and pharmacy benefit managers have contributed to the wave of health care acquisitions since 2014, pushing deal-making in the industry to record levels.
Also, an expected increase in federal interest rates, which will make borrowing costly, is expected to push companies to close deals over the next few months.
UnitedHealth could bid for either Health Net or Centene, or even the combined company, Leerink & Co. analyst Anagha Gupte said. Ms. Gupte said she now expects other smaller insurers such as WellCare Health Plans Inc. and Molina Healthcare Inc. to merge.
Centene’s buyout of Health Net will catapult it to the top of the government insurance heap, ahead of bigger rivals who dominate the private insurance market.
The combined company will serve more than 10 million members across the country, but will still be small in terms of total membership. Market leader UnitedHealth, for example, has nearly 46 million members.
Centene, which will also assume $500 million in Health Net debt, said the deal is expected to boost adjusted profit by more than 20% in the first year.
Publicly traded insurers may not feel too much financial pain in the short term if the U.S. Supreme Court strikes down Patient Protection and Affordable Care Act premium subsidies offered through the federal exchange and Congress doesn't act to restore the financial assistance, analysts say.