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With PPACA intact, path to health care deals gets clearer

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(Bloomberg) — With Thursday’s Supreme Court ruling on King v. Burwell out of the way, health insurers and hospitals can get back to making deals.

The court’s 6-3 ruling on the Patient Protection and Affordable Care Act (PPACA) case keeps PPACA premium tax credit subsidy money flowing to more than 6 million people who have used the PPACA exchange system to buy health insurance. That means more paying customers for hospitals and insurers and lifts a cloud hanging over the health care sector.

Uncertainty over the case “was the biggest obstacle to M&A that existed in the health care industry,” said Bill Bithoney, a managing director in the consulting firm BDO USA’s health care advisory practice. “People didn’t know what was going to happen.”

Now that they do, consolidation may speed up. Aetna Inc. (NYSE:AET) is said to be nearing an acquisition of Humana Inc. (NYSE:HUM), Bloomberg reported Thursday after the court ruling. And on June 20, Anthem Inc. (NYSE:ANTM) went public with a bid for Cigna Corp. (NYSE:CI).

See also: Aetna is said to be closing in on acquisition of Humana and Biggest health insurers to get even bigger under PPACA

 

Among large insurers, Aetna and Humana had the most riding on the court’s ruling, said Ana Gupte, an analyst at Leerink Partners. As much as 2 percent of their 2016 earnings were at stake, she estimated.

If deals for Humana and Cigna are consummated, the U.S. would be left with three giant health insurers in control of much of the market. So far, Cigna has rejected Anthem’s $184 cash-and-stock bid, and said its concerns included governance and a data breach at Anthem. Anthem has said it still wants to do a deal.

The exact terms of Aetna’s offer for Humana weren’t reported. Representatives of Aetna and Cigna declined to comment on Thursday. A Humana spokesman didn’t return requests for comment.

Hospital deals

The health care industry has been leading M&A activity in the past year. A record $400 billion of deals had been announced in the 12 months ended May 31. That figure includes drug and biotechnology transactions.

The ruling could also clear the way for hospital acquisitions. Shares of HCA Holdings Inc. (NYSE:HCA), Community Health Systems Inc. (NYSE:CYA) and Tenet Healthcare Inc. (NYSE:TNT) surged Thursday following the ruling, which kept millions of potential patients insured instead of showing up in the emergency room without coverage. The industry may also need to bulk up to compete with insurers in negotiations over medical services.

“You’re going to see dramatic consolidation within the hospital industry because they already have very thin margins,” said Chris Sassouni, a portfolio manager at Eagle Asset Management. “Scale will win.”

Overall, about 10 million people have purchased health insurance on the exchanges set up by the health care overhaul. That figure is projected to double next year, leaving plenty of expansion potential for both sectors.

“Most insurers are breathing a sigh of relief and getting on with their business,” said Dan Mendelson, chief executive officer of Avalere Health. The ruling is “good news for insurers who have invested in these markets and in the process of making a go of it commercially.”

—With assistance from Doni Bloomfield, Ryan Sachetta and Ed Hammond in New York and Matthew Campbell in London.