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Managed Care Becomes Merger Care

|Includes: Aetna, Inc. (AET), ANTM, CI, CVS, HUM, OCR, TGT, UNH

The top managed care providers are in a competitive process to buy each other out. The 'Big 5' are consolidating in an industry that has been a target for the past decade. These insurance providers include Aetna (NYSE:AET), Anthem (NYSE:ANTM), Cigna (NYSE:CI), Humana (NYSE:HUM), and UnitedHealth Group (NYSE:UNH).

Capitalizing an Economics of Scale

The goal to make health insurance more affordable has become a reality for most. In order to provide universal coverage, governmental programs, Medicare & Medicaid, transferred the risk to consumers and private insurers. Increasing risk pools has resulted in consolidations across the board, especially in Managed Care. Inefficiencies found in healthcare are primarily due to third-party administrators from these insurance providers. These mega firms have so many paper pushers as Gordon Gekko would say that they spend more time delaying transactions then completing them.

Managed Care providers are now attempting capitalize on the lower cost of capital and minimize future Medical Losses Ratios (MLRs). Obamacare was certainly effective in eroding margins in this industry with the recent increases in regulation, becoming the leading reason for recent M&A rumors.

These deals seem to be the result of a survival tactic as the larger, more efficient providers, rumor to acquire 'smaller' targets.

Bottom Line

In this scenario, the adage "Buy the Rumor, Sell the News" may turn out to be a profitable outcome. With the recent rumors, there may only be three or four major carriers that provide health insurance in the long run. As more news surfaces, the ideal acquisition targets will arise, Cigna , Aetna or Humana , will become suitable investment opportunities.

More Healthcare Deals

These recent announcements come with the rest of the merger mania taking place in the healthcare industry. CVS Health (NYSE:CVS) has released news on large acquisitions in the past few weeks alone, Omnicare (NYSE:OCR) and Target's pharmacies (NYSE:TGT), showing the buying power currently present in the Big Healthcare.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.