Aetna-Humana acquisition: What executives should know

Aetna recently announced that it will spend approximately $37 billion to buy Humana. The proposed deal, which was announced July 3, could make Aetna the second largest insurer.

Read: Determining the best approach to consolidation in healthcare

The deal is part of a growing wave of consolidation efforts by healthcare payers.

The Aetna announcement comes on the heels of a statement earlier this month that the Medicaid managed-care provider, Centene Corp., will buy Health Net, an insurer, in a $6.8 billion deal. And, while Cigna recently rejected a deal with Anthem Blue Cross-Blue Shield, The Wall Street Journal recently reported that the companies may still be in talks. 

Read: M & A deals reach record high under reform

In a statement released by Aetna, the company said the acquisition of Humana would strengthen its ability to lead efforts to transform healthcare delivery to a more consumer-focused marketplace; establish a leading Medicare Advantage and commercial player with enhanced nationwide presence; and add more than 14 million members, including 3.2 million Medicare Advantage members.

Aetna Chairman and CEO Mark T. Bertolini said, “The acquisition of Humana aligns two great companies and will significantly advance our strategy of more effectively serving members in a rapidly changing healthcare industry.”

To find out more about how the consolidation will affect other industry players, we asked several experts and consultants to weigh in. Here's what they said.

Key Takeaways

Don Hall, principal of DeltaSigma LLC, a consulting practice specializing in Medicaid and Medicare special needs plans, said the biggest takeaway for healthcare payers from the Aetna-Humana acquisition is that major healthcare players are forecasting stability and growth in the industry-and they are acting on it.

"The recent Supreme Court decision supporting [the Affordable Care Act] along with three years of positive experience since its passage are making healthcare executives bullish about the future," said Hall, who is also a Managed Healthcare Executive editorial adviser.

Dan MendelsonDan Mendelson, CEO of Avalere Health, an advisory company focused on healthcare business strategy and public policy, said the acquisition also makes it clear that health insurers are getting more into government markets, making it more likely that a Medicare or Medicaid beneficiary will get their healthcare from a national company.

In addition, Mendelson said, "These acquisitions enable the large companies to build scale, and to invest more in information technology. This is a key element in creating a higher quality healthcare system, so consumers should see more capable clinical information systems that drive care."

Jim Smith, senior vice president of The Camden Group, a healthcare consulting firm, said it's critical to note that Aetna and Humana have claimed "first mover rights" when it comes to consolidations.

"They have the first seats for the reviews needed by the regulators and politicians," he said. "The provider associations and public advocates are concerned about the impact upon their constituents and are expected to question these deals."

NEXT:What's driving the trend behind increasing consolidation efforts among payers?

Consolidation Drivers

Mendelson said one of the key drivers behind the increasing consolidation among payers is that, as a result of the ACA and other policy trends, employers and government payers increasingly expect health insurers to handle more clinical risk management. In addition, he said, these mergers are happening in light of the Supreme Court ruling that established a stable operating environment for the exchanges.

Jim SmithSmith agreed that drivers toward consolidation include federal law and policy changes. Another major force, he said, is the consolidation that is occurring in every sector of the healthcare industry.  "From local, state and national consolidation of providers and physicians to medical products and pharmaceuticals, everyone is looking to become larger and more efficient."

Smith added that managed care executives are also wondering how big a membership, and how much diversification of governmental, exchange and commercial businesses, they need to survive and prosper.

Don Hall"All continue to see the need to reduce the cost of administration and recognize the impact of the economies of scale on cost, quality and network negotiations," he said.  "They recognize the importance of administration and skilled people in the creation of the new care and innovation models needed to increase quality and reduce care costs.  Many see merger and acquisition as the only way to rapidly attain the size and expertise required to be successful going forward."

Hall agreed that many payers see consolidation, and therefore a larger membership base, as a way to lower administrative costs and moderate risks. "Greater size will also bring much greater leverage to provider and pharmacy contract negotiations," he said. "I expect that we will see a much stronger approach to controlling prices on some of the high-cost drugs driving up medical costs."

NEXT:What are your predictions for how the Humana acquisition will impact the industry?

Industry Impact

Smith said the Aetna-Humana consolidation will increase the payers' ability to compete in the Medicare Advantage and exchange markets. It will also better position them both to work with provider organizations as they adapt to the accountable care organizations and networks models.

Hall cautioned that smaller healthcare players may want to watch this growing trend toward consolidation very closely. As health plans consolidate into mega plans, smaller players will have a harder time thriving, he said. "Leverage is everything in provider negotiations and greater membership gets you greater leverage."