As health insurers scramble to get bigger, UnitedHealth sits pretty

Aetna's agreement to buy its rival Humana is only the first deal to come out of an amazing merger-and-acquisition free-for-all going on among the largest publicly held health insurance companies.

It's far from over, too. Aetna just won the prize for Humana with a deal announced at $37 billion, but it's far from clear this proposed combination gets through federal regulatory scrutiny unscathed. It's also at least possible Aetna yet gets outbid.

Cigna had been competing with Aetna to acquire Humana, and at the same time it was trying to hold off the persistent efforts of a competitor called Anthem to get Cigna to sell. The latest news is that these two have gone back to the table to negotiate.

About the only thing that's clear in this latest round of industry consolidation is who the winner will be when it's all over. That's going to be Minnetonka-based UnitedHealth Group.

UnitedHealth is going to win a tournament it doesn't even have to enter. It can jump in if it finds the right deal at a price that generates a good return. But deal or no deal, UnitedHealth will keep its spot at the top of the industry. With its growing Optum group of technology-enabled services, it's the best positioned for the long haul, too.

UnitedHealth Group declined the opportunity to talk about its plans, but it apparently hasn't completely sat this round out and may yet be trying to make a deal. The Wall Street Journal has reported that UnitedHealth has at least sent some sort of takeover overture to Aetna in the form of a letter.

The odds of ever buying Aetna now seem remote, but had UnitedHealth tied up Aetna and had Cigna been acquired by Anthem, there would've been nobody left to buy Humana. That had to be the nightmare scenario for Humana and its board.

It was an entirely reasonable fear, too. This is a business that favors the giants, companies with the breadth to cover the country with a full set of health plans, and with the biggest budgets for technology, too. It's why this industry has reached the high-stakes end stage of a process described by the authors of a well-known Harvard Business Review article called "The Consolidation Curve."

The point the authors made is that every company fits in somewhere on the four stages of the consolidation curve, either that or it's already disappeared. All industries go through it. It may be hard to believe now, but about a century ago Detroit must have looked a little like Silicon Valley does now, with more than 270 upstart carmakers fighting for customers and capital.

That's stage one, with lots of start-ups growing quickly and others quickly falling by the wayside. That seems to describe the health insurance business back in the 1970s, when the health maintenance organization form of health insurance really got rolling and UnitedHealth got its start.

The second stage is when the pace of acquisitions really picks up, when companies try to enhance their competitiveness by getting bigger, and thus more efficient, as well as offering a broader array of products or services.

The survivors of this stage learn how to raise the capital to keep buying as well as develop real know-how in picking the right targets and integrating them once the deals close.

Its most recent deal, which has yet to close, is for Catamaran Corp., a combination that will make UnitedHealth's Optum one of just a handful of major players in the rapidly consolidated pharmacy benefit management market.

With the list of major players having already shrunk to the point that all the CEOs can ride in one car, it seems likely they would have to talk about each other a lot in conversations with their shareholders. Yet Aetna made a comically pointless effort to avoid mentioning UnitedHealth by name on slides its executives just used to explain their planned combination with Humana.

One of the first slides had one of those standard bar charts showing that the combined companies would have about $115 billion in 2015 revenue. The only one bigger, represented by the big bar on the far left at $144 billion, is "Company A."

Company A? Couldn't they just have typed the name of UnitedHealth Group?

And, by the way, if Company B and Company C — Anthem and Cigna — also get together, Company A will still be the largest.

Those with long memories may remember that UnitedHealth once was the company that was buying Humana. The year was 1998, and the $5.5 billion all-stock deal fell apart before it could close when UnitedHealth blindsided Wall Street with a massive restructuring charge. Its stock price was crushed, and with it the value of the deal to Humana shareholders. Within days their merger was scuttled.

Buying Humana "would have given UnitedHealth a considerable competition edge against industry giants such as Aetna," the cable news outlet CNNfn noted.

Remaining competitive with the industry's giants can be a huge challenge in wave after wave of consolidation. But unlike 1998, that's now something only executives in the rest of the industry have had to worry about.