The healthcare industry has been in the news in a big way for much of the last three or four years. Although moral and legal wrangling has taken stage, it appears that some companies are engaging in merger and acquisition activity to bolster their positions in the Medicare market. Indeed, the youngest of the baby boomer generation are now approaching retirement age, which likely marks the beginning of an expansion of the Medicare segment.

The market potential generated by these aging individuals has caught the attention of some big players in the medical services industry, particularly CIGNA (CI) and UnitedHealth Group (UNH). These companies have made strategic moves to expand their participation in the segment. In fact, both have made definitive agreements to acquire companies that have strong Medicare customer bases.

On October 24, 2011, CIGNA Corporation announced that it will purchase HealthSpring (HS), a large Medicare Advantage care coordinator. Under terms of the deal, CIGNA will acquire all outstanding shares of HealthSpring. Shareholders will receive $55 per share, a 37% premium over the stock’s $40.16 closing price the day before the offer was announced.

CIGNA has entered into a bridge financing facility with Morgan Stanley of up to $2.5 billion to fund the acquisition. Ultimately, however, the all-cash transaction is expected to be covered 80% by debt and available cash, and 20% by equity. The Board of Directors of each company has approved the purchase, which is now awaiting regulatory and shareholder approval, and is expected to close in the first half of 2012.

It appears that both parties are entering into the transaction with strong enthusiasm. For CIGNA, the addition of HealthSpring opens new doors and adds to its product portfolio. HealthSpring’s current client base includes roughly 340,000 Medicare Advantage members across 11 states, as well as the District of Columbia. Too, it operates a stand-alone Medicare prescription drug business, accommodating upwards of 800,000 customers.

HealthSpring has a nice history of internal growth, and CIGNA expects this trend will continue into the future, even in light of changes that may be brought on by the government. The addition of HS to CIGNA provides an automatic new potential Medicare-Advantage client base, coming from retirees currently in CIGNA’s employee-sponsored plans. What’s more, HealthSpring now has access to CI’s resources, which as HS notes, will aid in its expansion through organic and acquisition-driven growth.

UnitedHealth Group entered into a similar, though smaller, all cash agreement with Baltimore-based XL Health. The latter is a managed care organization focusing on the Medicare population, particularly those with chronic health conditions. The transaction is expected to cost UNH roughly $2.0 billion. It is likely to close in the first half of 2012, pending regulatory approval, and UnitedHealth projects it will be accretive to earnings in 2012.

Although UNH already has one of the largest Medicare Advantage portfolios, XL Health makes a nice contribution. Roughly 80%-90% of Medicare recipients have at least one chronic health condition, while 50% have three or more. XL Health provides a clinical program for its users, seeing just about all of their members in home. This approach enables a close monitoring of care and medical record documentation, which makes for not only optimal patient care, but reliable documentation for revenue management with the government.

The integration of XL Health will allow UnitedHealth to build upon its existing base and develop a new level of expertise in care provided to the elderly. In fact, the quality of care patients receive may be an important factor in attracting the new clients that are expected to enter the segment in the coming years.

Though the two acquisitions above may differ in scale, the trend towards placing a focus on Medicare and its recipients is evident. Contenders in the healthcare and medical services industries are aware of the upcoming influx of Medicare recipients with the aging of the baby-boomer generation. It would not be surprising to see additional purchases by companies, such as Aetna (AET) or Wellpoint (WLP), hoping to increase their market share.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.