The health care sector has seen a huge amount of mergers and acquisition (M&A) activity in 2014 and 2015, with health insurers and pharmaceutical companies comprising the bulk of the deals. There are a number of factors driving these deals, including the continued strength of the economy, Obamacare and drug company mergers to gain access to new drug therapies.

At this point, it is unclear whether M&A activity will continue among health insurers. The proposed mergers are receiving scrutiny from government regulators who may be concerned about the lack of competition in the industry if the deals go through. There appears to be more potential for mergers among drug companies with consolidation among major players and in the sector, and new biotech breakthroughs being announced.

Continued Economic Strength

The continuing strength of the economy along with continuing low interest rates are the main reasons for the activity. Low interest rates make borrowing money relatively cheap for large corporations. In addition, the stock markets have been generally positive since the 2008 financial crisis. The Federal Reserve has indicated it may move interest rates higher in late 2015 or early 2016. Still, any rate increase would be minimal at first. A slow move upping the rates does not appear to imperil further merger activity at this point.

Obamacare

Obamacare and the Affordable Care Act have changed the health care insurance landscape on a massive scale. Despite numerous attempts to have the legislation overturned, it is still in effect at this point. Obamacare seeks to make health insurance more affordable and to allow people who were previously not covered to obtain insurance. Estimates indicate the number of insured has dropped by 25% since Obamacare was enacted.

Many health insurers were caught off guard by the number of new clients seeking their coverage plans. Many of these new customers have government subsidies. The subsidies allow those with lower incomes to afford health insurance. The influx of potential customers has bolstered the coffers of health insurers, driving a good portion of the M&A activity.

Health Insurance Mergers

The health insurance industry has seen a number of very large acquisitions. Aetna is buying Humana in a cash and stock deal estimated at around $34.1 billion. Aetna agreed to pay a significant premium of 23% for Humana shares when the deal was announced in June 2015. Humana shareholders would get $230 for each of their shares. The new company estimates its revenues will be around $115 billion per year. Another major acquisition by Anthem of Cigna was announced in July 2015. This deal is estimated to be around $54 billion.

The deals have yet to be approved by regulators. They are facing political scrutiny by certain members of congress. Large lobbyists for both doctors and hospitals are urging the Department of Justice to take a closer look at the proposed transactions. The lobbyists argue the deal will reduce competition and allow the new companies to raise prices while eliminating choices for senior citizens on Medicaid programs. The health insurers disagree, saying the mergers will allow the new companies to obtain reduced prices for services from hospitals. The future of health insurance mergers is murky since these transactions are still awaiting government approval.

Drug Company Consolidation and Acquisitions

Deal activity in the pharmaceutical sector is red hot as well. It is estimated there were $221 billion in deals in the sector during the first half of 2015. This is three times the amount than in the first part of 2014. In one of the largest deals of the year, Actavis bought Allergan in a stock and equity transaction valued at around $70.5 billion. In another deal, generic drug maker Teva Pharmaceuticals said it will buy the generics business in a spin-off from Allergan in a deal valued at $40.5 billion. Combined revenues for the new company are estimated at $23 billion for 2015.

There have also been a number of acquisitions where larger drug companies are buying smaller companies with promising drug candidates in their portfolios. This allows the larger companies to spend less on research and development. New drugs must go through a rigorous approval process from the FDA. Drug companies can reduce time frames for bringing new products to market by acquiring companies with drugs that are well into the approval process.