(Bloomberg) — America’s biggest health insurers are about to get even bigger, driven into a wave of consolidation by the Patient Protection and Affordable Care Act (PPACA) new regulations and markets.
The disclosure of Anthem Inc. (NYSE:ANTM) Saturday that it’s offered about $47 billion for Cigna Corp. (NYSE:CI) is the first public confirmation the deal-making is in full swing. Cigna rejected the offer on Sunday, despite Anthem’s attempt to pressure Cigna’s board by taking the offer public. Anthem, Aetna Inc. (NYSE:AET) and UnitedHealth Group Inc. (NYSE:UNH) all are poised to emerge as buyers or sellers when the dust settles.
Driving the consolidation is PPACA, the 2010 health law that put tougher rules on the industry, demanding more covered services, better care and a ceiling on profits. It funded coverage for the uninsured, and companies are racing to capture the more than 20 million customers who will buy coverage through the PPACA markets, or Obamacare public exchange system.
“The industry is far more regulated under Obamacare and so companies need to do a better job at negotiating better unit costs and contracts,” said Ana Gupte, an analyst with Leerink Partners. “Market share helps. The larger you are, the stronger standing you have.”
Gupta predicts that the “big five” insurers will merge into a “big three,” likely composed of Aetna, Anthem and UnitedHealth.
A combined Anthem and Cigna would form an insurance giant with more than 50 million customers, adding power to negotiate prices with hospitals and doctors. Cigna also has a large presence overseas, another source of potential growth.
Cigna said in a statement Sunday that Anthem lacked a clear strategy for growth or for how to run a merged company. Cigna called Anthem’s offer inadequate and said it had fundamental concerns about a deal.
Anthem isn’t alone in seeking a major deal. While the Indianapolis, Indiana-based insurer has also expressed interest in Humana Inc. (NYSE:HUM), so have Aetna and Cigna, Bloomberg has reported. The Wall Street Journal has said UnitedHealth might be interested in Aetna or Cigna, and that Aetna has proposed buying Humana.
See also: Aetna may acquire Humana or Cigna
As Anthem and Cigna go back and forth, a deal isn’t guaranteed. Anthem has made multiple approaches since last year and been rejected. Going public raises the stakes.
“Anthem is upping the ante,” said Chris Koller, a former Rhode Island health insurance regulator. “They have been trying to do this by cooperating but now they are forcing the deal by going public and putting up an offer that is hard for the board to refuse.”
One major sticking point has been who will head a combined company, according to Anthem.