Although judges shot down Anthem Inc's (ANTM.N) $54 billion (£43.1 billion) acquisition of Cigna Corp (CI.N) and Aetna Inc's (AET.N) $35 billion takeover of Humana Inc (HUM.N) on anti-trust grounds, the rulings left scope for a possible combination of Cigna and Humana, industry insiders said.
Cigna would have both the motives and finances to pursue an acquisition of Humana, these experts suggested. Because of its much smaller Medicare Advantage business, Cigna may have a better shot at winning a regulatory green light, they added.
"They may have blocked the merger (with Aetna), but that's not the end of the song," said Randal Schultz, an attorney at Lathrop & Gage LLP focusing on the healthcare sector.
Cigna and Humana did not respond to requests for comment. Aetna declined to comment.
A merger of Cigna and Humana would allow them to save money by cutting back administrative costs in overlapping markets and holding down healthcare costs by boosting the combined company's bargaining power with healthcare providers and drug makers.
To be sure, further industry consolidation is not seen as imminent following the scuppering of two mega deals in the sector. Anthem has said it wants to appeal the court ruling and Cigna is still weighing how to proceed. Aetna and Humana have yet to announce their plans.
When asked whether a big deal is out of the question right now, Cigna CEO David Cordani left the door open in a conference call last week with analysts discussing fourth-quarter earnings, saying "never say never, in terms of large versus small."
Moreover, U.S. President Donald Trump's intention to repeal and replace his predecessor's signature healthcare law, the Affordable Care Act - also known as Obamacare - will not remove the incentives for health insurers to consolidate, and could even bolster them.
With Republican lawmakers and policymakers in control of Washington, Humana's Medicare Advantage assets could become even more valuable.
U.S. House of Representatives Speaker Paul Ryan has argued for more privatisation of Medicare, the government-run insurance programme for the elderly and disabled. While the White House does not yet back Ryan's proposal for government-sponsored vouchers for private insurance plans, analysts say such a policy is likely to spur more growth and profits in privately run Medicare Advantage plans.
For Cigna, a deal with Humana could help offset its slower- growing business managing insurance plans for large companies, which makes up 85 percent of its revenues and is considered more vulnerable to economic downturns.
Cigna's Medicare Advantage footprint is less than half that of Aetna's, giving it a stronger footing with antitrust regulators, investors and analysts said.
"There would be a lot fewer (antitrust) objections to a Cigna buyout of Humana than there were with Aetna, and I think Humana could get a higher price," said Jeff Jonas, a portfolio manager at GAMCO Investors, which owns shares in all five big U.S. health insurers, including Humana.
The terms of any new deal would need to reflect the fact that some aspects of Humana's business has improved since it agreed to sell itself to Aetna in 2015, Jonas said.
That includes Humana's decision to largely withdraw from the online exchanges for individual plans set up by the Affordable Care Act last year, Jonas said. Following losses it suffered on these exchanges, Humana said this week its individual membership participation was down 70 percent.
A NEW RACE FOR HUMANA
Humana emerged as a coveted acquisition target in 2015, when an approach by Cigna triggered a sale process for the company in which Aetna prevailed. Bidders were attracted to Humana's robust presence in the fast-growing Medicare Advantage market, where it has more than 3 million customers.
"We see real potential for Cigna to re-engage, and possibly Anthem as well to be a factor," Justin Lake of Wolfe Research wrote in a January note.
Cigna would likely be "much more willing" than Aetna was to simply divest all of its Medicare Advantage business for antitrust reasons, which is much smaller and is growing more slowly than Aetna's, Lake said.
In total, Aetna provides Medicare Advantage services to around 1.2 million people. Aetna had agreed to sell insurance plans serving nearly 300,000 Medicare Advantage customers to smaller peer Molina Healthcare Inc (MOH.N). But that was only about half of the roughly 600,000 customers that JPMorgan Chase & Co (JPM.N) said it would have needed to sell to get a green light from regulators.
Anthem could also potentially take an interest in acquiring Humana, analysts said. However, it would likely face considerably greater antitrust scrutiny. With more than $80 billion in expected annual sales, Anthem is roughly twice the size of Cigna. It also has a larger Medicare Advantage business, serving around 1.2 million people, compared with Cigna's roughly 500,000.
While this would make it more difficult for Anthem to compete against Cigna as a suitor for Humana from an antitrust perspective, it could give Cigna grounds to argue that competition would not be stifled were it to acquire Humana, given Anthem's major presence in the market.
Humana could also attract interest from less obvious players, including pharmaceutical benefits managers (PBMs) such as Express Scripts Holding Co (ESRX.O) or CVS Health Corp. (CVS.N), said Leerink Partners LLC analyst Ana Gupte.
CVS had no immediate comment. Express Scripts declined to comment. The model of combining PBMs, which negotiate drug prices on behalf of insurers, with insurance companies themselves was pioneered by UnitedHealth Group Inc (UNH.N). It doubled down on the strategy in 2015 with the $12.8 billion acquisition of Catamaran Corp.
That business, now part of its existing OptumRX unit, outperformed analyst expectations during the latest quarter and has won some large contracts away from competitors. The company says owning the business helps it better assess customer health costs, a key component of premium pricing and profits.
(Reporting by Carl O'Donnell in New York; Additional reporting by Caroline Humer in New York and Diane Bartz in Washington, D.C.; Editing by Greg Roumeliotis and Dan Grebler)