Health insurers look to merge in bid to cut costs

Merger speculation involving health insurers abounds as the sector positions itself for the economic upheaval caused by the Affordable Care Act.

According to the Wall Street Journal, UnitedHealth Group (UNH) and Anthem (ANTM) are pursuing deals with smaller rivals Aetna (AET) and Cigna (CI). Anthem and Cigna have been in buyout discussions for months. Cigna, however, has rebuffed the Indianapolis-based company's overtures, the newspaper said. Meanwhile, Aetna is reportedly interested in merging with Humana (HUM).

Vishnu Lekraj, an analyst with Morningstar, said he wouldn't rule out any mergers among health insurers including deals among the smaller companies.

"The bigger you are the better off you are. The larger membership base that you have, the more diversified it is, the better off you are going to be in terms of scaling your centralized costs, getting pricing power with your providers and being able to effectively compete," Lekraj said.

Wall Street is primed for an M&A wave in the sector, with shares of Cigna rising more than 49 percent so far this year; Anthem and Aetna up more than 30 percent and UnitedHealth gaining 17 percent. Officials from all four companies either declined comment or couldn't be reached.

In a note, Leernink Partners analyst Ana Gupte argued the most likely combinations involve a pairing of Aetna and either Cigna or Humana, or a deal between Anthem and Cigna or Humana. According to the Journal, Anthem has made two offers for Cigna in the past 10 days, the latest for $175 per share. Anthem is the second-largest health insurer by revenue, trailing only UnitedHealth.

The regulatory hurdles for a UnitedHealth purchase of Aetna "would be considerable," wrote Gupte, while Cigna CEO David Cordani has "personal aspirations that are unlikely to be met" in a merger with UnitedHealth.

Health insurers are under increased pressure to cut costs as more of their business comes from government programs and exchanges and as traditional employer-based coverage dries up.

"Insurers are taking defensive positions," said Larry Boress, president and CEO of the Midwest Business Group on Health.

The Affordable Care Act is expected to cost taxpayers $506 billion over the next decade, 29 percent less than was first forecast when the law was passed five years ago.