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4 reasons Walmart would want to buy insurer Humana

Walmart's "opposite" announcements
Breaking down the impact of Walmart's "opposite" announcements 03:31

Walmart (WMT) is already the country's largest retailer, with four of 10 Americans shopping there every week. Now the retailing giant may be eyeing an expansion into health insurance.

Walmart, according to The Wall Street Journal, is engaged in preliminary discussions with Humana, which could lead to an acquisition of the health insurer, or a deeper partnership.  

The health care industry is undergoing massive consolidation. Pharmacy CVS is buying insurer Aetna, and insurer Cigna is snapping up pharmacy benefits manager Express Scripts. 

At the same time, Walmart's core business -- retail -- is undergoing major shifts, with stiff competition online from Amazon. 

And Amazon is also jumping into the health care market. It said in January that it was forming a new business with Warren Buffett's Berkshire Hathaway and JPMorgan Chase to take away the "profit-making incentives" of the health care industry. Amazon hasn't said much about the venture, although the three companies said they will first provide services to their combined 1.2 million employees. 

"Walmart will have read these reports and will understand the threat of allowing Amazon to get too powerful a grip on the lives of consumers," noted Neil Saunders, managing director of GlobalData Retail, in a research report.  "Although Walmart is unlikely to initiate any deal merely to fend off future competitive risks, Amazon will be at least part of the consideration."

There are plenty of potential downsides for Walmart. For one, the health care industry is notoriously complex. It's unclear whether Walmart can make much of a difference in an industry that's both fragmented and resistant to change. 

And consumers may be resistant to the idea of getting their health insurance from Walmart even though many fill their prescriptions at its pharmacies, said Paul Friederichsen, a contributing writer to Branding Strategy Insider.

"Consumers don't want to associate healthcare issues and coverage for surgeries and hospital stays with shopping carts and low prices on potato chips," Friederichsen said. 

Nevertheless, he said both brands have strong reputations. "Demographically, there is a nice synergy between the two in terms of customers," he added.

There are a number of ways Walmart could benefit from acquiring Humana.

1. Tap the Medicare market

Humana is the second-largest provider of Medicare Advantage plans, the private insurance programs offered through Medicare. 

These plans are representing a larger share of the insurance market for Americans over the age of 65, now grabbing about one-third of all Medicare enrollees. And Medicare's rolls are slated to grow over the next two decades as the ranks of senior citizens jump from 14 percent of the total U.S. population to 21 percent.

Walmart already fills prescriptions for many seniors at its pharmacy locations. Offering Medicare Advantage sign-ups at those pharmacies could help a combined Walmart-Humana grab more of the market. 

2. Compete against Amazon

Amazon and Walmart are both heavily investing in their services as they compete in an arms war to provide new services to customers. 

They've so far focused on retail products -- like same-day grocery deliveries -- but if Amazon jumps into health care in a meaningful way, Walmart would want to be able to compete. For instance, if Amazon enters drug-benefit arena, Walmart would want to keep up, given it operates pharmacies in its retail stores. 

3. Increase profit margins

Retail is a notoriously tough industry for profits, and it's only getting worse.

Consumers are increasingly cost-conscious and unwilling to buy products at full price. While Walmart has navigated those consumer expectations and boosted sales last year, it's facing new profit pressure due to investments in ecommerce and other services. 

Walmart's net income has declined in recent years, while Humana's profit has more than doubled. Humana's profit margin is 4.6 percent, or more than double Walmart's. 

4. To gain a data trove on customers

Humana would deliver an entirely new data set to Walmart, shedding light on consumer health issues and behaviors. Saunders envisions Walmart tapping that data to "improve decision making and health outcomes." 

Walmart is the country's largest grocer, which means it could use Humana data to prompt consumers to buy certain groceries at its stores. For instance, a consumer with high cholesterol could be prompted by Walmart to buy heart-healthy foods. 

Some customers may feel their grocer has turned into a "big brother"-like entity. But the potential is clear.  "As much as this raises ethical concerns about privacy, there would be logic in sharing data between the retail and insurance divisions," Saunders said. 

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