The proposed cash-and-stock deal, announced early Friday, would make Aetna a sizeable player in the rapidly growing Medicare Advantage business, which offers privately run versions of the federally funded health care program for the elderly and some people with disabilities.
Humana has nearly 3.2 million people enrolled in Medicare Advantage plans, a total that falls just sort of market leader UnitedHealth Group (UNH).
The combination also would bolster Aetna's presence in the state- and federally funded Medicaid program and Tricare coverage for military personnel and their families.
The deal value totals about $37 billion counting debt.
Hartford, Connecticut-based Aetna announced its deal a day after the Medicaid coverage provider Centene said it will spend $6.3 billion to buy fellow insurer Health Net. That deal would help Centene expand in the nation's biggest Medicaid market, California, and give it a Medicare presence in several western states.
The federal health care overhaul is expanding Medicaid coverage in several states as it attempts to provide health coverage for millions of uninsured people. Meanwhile, Medicare Advantage has seen its total enrollment triple over the past decade to 16.8 million people.
"Government markets are the most rapidly growing aspect of the system," said Dan Mendelson CEO of the market research firm Avalere Health.
Friday's deal comes two years after Aetna completed another push into government business with the $6.9 billion acquisition of Coventry Health Care, which administers Medicaid coverage and offers Medicare Advantage plans.
Health insurers have been trying to consolidate for weeks in a fresh merger wave. The Blue Cross-Blue Shield carrier Anthem (ANTM) went public late last month with an offer of more than $47 billion for another insurer, Cigna (CI).
Cigna rejected that deal, but The Wall Street Journal, citing anonymous sources, reported Thursday that the companies were still talking.
Health insurers see several advantages to combining. These multibillion-dollar deals offer an infusion of new business at time when growth has slowed in the biggest part of their business, employer-sponsored health coverage. Plus more employers are opting to pay their own insurance claims and hire insurers to administer the coverage. That's a less lucrative line of work for managed care companies.
Big deals also allow companies to quickly diversify their products and cover more territory. They also improve their technology and can ultimately save money by combining the back-office functions of two companies and cutting overlapping jobs.
The impact on consumers can be murky and likely won't be felt for at least a year, because insurers have already finalized most of their plans for coverage that starts in January. A combination may lead to fewer choices and some price changes for consumers, depending on where they live and who already is in their market. A deal also may foster technology improvements that lead to things like better smartphone applications for pricing or finding health care.
Aetna's purchase price for Humana includes a combination of cash and stock worth about $230 a share, based on Thursday's closing price of Aetna's stock. Aetna shareholders would wind up owning about 74 percent of the combined company, and Aetna's leader, Mark Bertolini, would serve as chairman and CEO.
The combined company will cover more than 33 million people. Only UnitedHealth Group Inc. and the Blue Cross-Blue Shield carrier Anthem Inc. cover more. A combined Aetna-Humana would be the second-largest insurer by revenue.
Shares of Aetna and Humana closed at $125.51 and $187.50, respectively, Thursday. Markets were closed Friday for the July Fourth holiday.
The shares of both companies, like several other insurers, have soared to all-time-high prices this year. The price of Humana shares, in particular, bolted past $200 in May after The Wall Street Journal reported that the insurer was a takeover target.
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