Humana received acquisition interest Friday--a move that, if finalized, would create a potential domino effect of consolidation throughout a health insurance industry that faces increasing pressure to rein in costs.
Humana has been working with advisers at Goldman Sachs Group since last year, in a move believed to have signaled the insurer's interest in a potential deal, reported the Wall Street Journal.
Thanks to its booming Medicare business, Humana is one of the Big Five for-profit insurers that bankers and analysts see fit for industry consolidation, noted the WSJ. Currently, Humana is second only to UnitedHealth with 3.19 million Medicare Advantage beneficiaries, or 18 percent of the total enrollment in private plans.
Additionally, FierceHealthPayer previously reported, Humana posted $1.1 billion of pretax income on its $48.5 billion in revenue last year, while its 2015 first quarter membership rose to 14.2 million and revenue increased 18 percent--this despite falling short of Wall Street's expectations.
But Humana has voiced its difficulties with its Affordable Care Act exchange business, and also disclosed a Justice Department analysis that detailed how Medicare Advantage insurers score their members' risks, which ultimately impacts their payments, according to the article.
Two weeks ago, speculation surfaced that Aetna would soon make a move to buy either Humana or Cigna. The WSJ article pointed out that both Aetna and Cigna had conversations with Humana regarding a potential purchase. The rumor mill also mused last week that Anthem may be ready to acquire Humana. A UnitedHealth deal--a theory that has yet to gain traction--is unlikely due to the size of its combined Medicare business, which could link to antitrust pushback, noted the WSJ. Ultimately, mergers could help insurers boost their leverage in negotiating rates with providers.
So why now for Humana? The insurer is a big player in government services because of Medicaid and Medicare Advantage--which mostly likely will experience the first positive rate increase in 2016 since implementation of the ACA--Thomas Carroll, an analyst with Stifel Nicolaus, told NBC News.
Anthem and Aetna both need Humana as a way to remain relevant and financially viable, Carroll said. "Our bet was Anthem, but Cigna is also plausible ... In terms of looking at valuation, it's hotly debated. We're expecting at least a $230 deal price for Humana on the stocks, if not more,"
Prior to the WSJ reporting, Humana's market value was $27 billion. Shares jumped more than 17 percent and hit a 52-week high of $211.25 immediately following the news.