NEW YORK (The Deal) -- Ads for health insurance are everywhere -- in magazines, on Web sites and plastered throughout subway cars.
Many observers say they believe that the industry is due for a substantial round of consolidation. The Wall Street Journal recently added fuel to the speculative fire with a report that mammoth insurer Humana (HUM) -- with a market capitalization of $31.5 billion -- is exploring a potential sale with the help of Goldman Sachs (GS). Possible bidders include Aetna (AET) and Cigna (CI).
Walter J. Olshanski, managing director at advisory firm WJO Healthcare, said Humana is likely exploring a sale now because of its large and potentially valuable Medicare business. That operation is growing steadily and is benefiting from stable reimbursement levels.
"Humana's Medicare business size is a rarity in that there are few opportunities for large insurers to accumulate over 3 million members, either organically or inorganically," Olshanski explained.
Olshanski said that payors want to increase membership levels and that any acquirer of Humana could reap this benefit. "For Humana's investors, now could be a near-term high-water mark for valuation," he said.
Olshanski previously worked for Aetna's corporate development and mergers-and-acquisitions group, helping to purchase large health insurance plans.
FTI Consulting managing director Jim Toole said consolidation in the health insurance industry has been on hold since 2011 in part due to the unfavorable state of the economy but mostly because of the questions and concerns surrounding the Affordable Care Act. As health insurance stocks have gained more favor, these companies likely have surplus levels of cash on hand to use on acquisitions, Toole said. The big five -- Aetna, Cigna, Humana, UnitedHealth Group (UNH) and Anthem (ANTM) -- need new ways to achieve growth, which will include acquisitions, Toole explained.