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Humana Acquisition Could Be Aetna’s Key Long-Term Growth Driver

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Jan. 29 2016, Updated 10:07 a.m. ET

Humana acquisition

Aetna’s (AET) acquisition of Humana is mainly aimed at increasing the combined companies’ exposure to the high-growth Medicare business. This acquisition, announced on July 3, 2015, is currently being scrutinized by antitrust regulators.

If approved, the acquisition will result in Aetna-Humana having the highest number of Medicare Advantage (or MA) and Medicare Prescription Drug Plan (or PDP) memberships in the United States.

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The above diagram shows that after the deal is completed, the combined Aetna-Humana entity would have a greater exposure to the Medicare segment than Aetna alone. Aetna has also projected that by 2018, the Aetna-Humana combined company would manage to earn operating EPS (earnings per share) of about $11.

Synergies

If the Aetna-Humana deal goes through, the combined entity will be in a better position to negotiate favorable payment terms and facilities from hospitals and other healthcare providers. The deal is also expected to reduce Aetna’s total administrative expenses, as the companies would reduce duplicate marketing and selling efforts.

In addition, Aetna could also leverage Humana’s in-house pharmacy benefit management business to further control its expenses. Aetna could then terminate its contracts with external pharmacy benefit managers such as Express Scripts and CVS Health.

The acquisition risks

The Aetna-Humana deal would most likely result in the second-largest health insurance company by market size. Antitrust regulators could reject the deal. In that case, Aetna would have to pay Humana $1 billion in fees. Other acquisitions have faced similar risks from antitrust regulations. Some of them include deals between Centene (CNC) and Health Net and between Cigna (CI) and Anthem (ANTM).

You can get exposure to Aetna through the Vanguard Health Care ETF (VHT). Aetna accounts for 1.2% of VHT’s total holdings.

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