Investors closely following potential merger wave

The takeover game is rampant among U.S. health insurers and stock investors are filling the stands.

The iShares U.S. Healthcare Providers exchange traded fund has attracted $247 million in net inflows this year, the biggest first-half total since it started trading in May 2006. The ETF has gained 21 percent in 2015, seven times more than the Standard & Poor’s 500 Index and almost twice a benchmark gauge of health-care stocks.

Even after Cigna Corp.’s decision on Monday to reject a $47 billion bid for Anthem Inc., the top five U.S. health insurers face a round of potential mergers amid heightened antitrust scrutiny and rising patient spending. Sensing an opportunity to ride a wave of premiums, equity investors are piling in.

“People will chase after any area of the market that’s seeing M&A,” Bruce Bittles, chief investment strategist at Milwaukee-based Robert W. Baird & Co., which oversees $110 billion, said by phone. “Deal momentum is pushing the whole sector north.”

Interest in the industry has pushed the market capitalization of the iShares ETF, which tracks the Dow Jones U.S. Select Healthcare Providers Index, to the brink of $1 billion. The fund has a market value of $998 million. It’s added almost $400 million in market cap since the start of the year, according to data compiled by Bloomberg.

Industry consolidation

Corporate acquisitions have helped prolong the six-year bull market this year as investors have purchased stocks seeking possible takeover premiums. There has been $910 billion of U.S. M&A announced, putting 2015 on track for a record, according to Bloomberg data. The health-care sector saw $399 billion of deal activity in the 12 months ending in May, an all-time record, the data show.

Consolidation among insurers has historically led to higher premiums, according to Leemore Dafny, a professor at Kellogg School of Management at Northwestern University who has studied competition in the industry.

Activity is showing no sign of slowing on the health insurer deal carousel. In addition to its bid for Cigna, Anthem has also expressed interest Humana Inc., the smallest of the top five ranked by market value, as have Aetna Inc. and Cigna. UnitedHealth Group Inc. might be interested in Aetna or Cigna, and Aetna has proposed buying Humana.

Fueling the potential consolidation is the Obama administration’s 2010 health law, which put tougher rules on the industry, demanding more covered services, better care and a ceiling on profits. Companies are racing to capture the more than 20 million customers who will buy coverage under the law.

Both the Justice Department and the Federal Trade Commission, which share antitrust enforcement, are also eyeing rising health-care spending by consumers.

“The sector has the demographics working in its favor right now,” Bittles said. “We have it as one of the top sectors for investors to go into right now.”