With CVS set to buy Aetna, here's why Humana could be part of the next big insurer deal

Humana building
Humana has always been an attractive acquisition target, given its specialization in the highly competitive Medicare Advantage market.

Now that CVS and Aetna have made their merger agreement official, another major insurer may be in the market for a deal of its own: Humana.

In the health insurance sector—as in other industries—a deal the size of the CVS-Aetna transaction often has the effect of spurring other major players to pursue mergers. They may have little choice, as failing to bulk up themselves could leave companies in the position of losing market share to their soon-to-be-larger and more diversified competitors.

A prime example occurred in the summer of 2015, when after months of behind-the-scenes negotiations, Aetna announced it would acquire Humana, followed in swift order by Anthem inking a deal to buy Cigna. Both deals ultimately collapsed after federal judges sided with the Justice Department’s case that they would harm competition.

RELATED: 5 things to know about the CVS-Aetna deal

Now, with its former would-be acquirer announcing a $69 billion deal with CVS, Humana may be ready to make another deal. While the company has made no announcement yet, there have been signs it’s preparing for a sale, including:

  • Humana announced in early November that it would sell KMG America Corporation, a subsidiary that provides long-term care insurance policies. Before its deal with CVS, Aetna made a similar move, selling its group life and disability insurance business for $1.45 billion.
  • The insurer has also announced it will cut its workforce by 2,700 employees, which executives said will help free up funds to reinvest in its business. Cost-cutting moves like workforce reductions and limited asset sales can signify an impending sale, since they may make companies more attractive to potential buyers.
  • Humana recently updated its change-in-control policy, which outlines the severance that top executives will receive if they are terminated following a sale of the company. The insurer said it made the change to align its policies with “market best practices,” but the filing added fuel to the merger speculation.
  • The company has always been an attractive acquisition target, given its specialization in the highly competitive and lucrative Medicare Advantage market. MA enrollment overall has grown steadily in recent years, and Humana’s share of MA enrollees—17%—is second only to UnitedHealthcare, per the Kaiser Family Foundation. In addition, Humana said this week that it expects its individual MA membership growth in 2018 to approach the higher end of its previous projection of 150,000 to 180,000 members, according to an SEC filing.

If Humana does make a deal, its most likely acquirer is Cigna, Leerink Partners analyst Ana Gupte previously predicted. But it’s also possible that Anthem, Walmart or Walgreens could make a play to buy Humana—the latter two companies likely responding to both CVS’ deal with Aetna and Amazon’s looming entry into the drug distribution business.