But expected scrutiny from antitrust regulators, along with signs of some emerging operational challenges at Humana, will put pressure on Aetna and its chief executive, Mark Bertolini, to demonstrate that the huge bet will pay off. Following the deals closing, Mr. Bertolini will serve as the chairman and chief executive of the combined company.

Both chief executives said they are confident the deal ultimately would be approved. Antitrust reviews are never totally predictable, but we believe its very manageable, Mr. Bertolini said in an interview. If the takeover fails on antitrust grounds, Aetna would owe its smaller rival $1 billion, according to a person familiar with the matter.

Under the deal, Humana shareholders will swap each share for $125 in cash and 0.8375 Aetna shares. Aetna expects to finance the cash portion, in part, by issuing about $16 billion in new debt. Upon closing, which the companies expect to occur in the second half of next year, Aetnas shareholders would own about 74% of the combined company and Humanas shareholders would have the rest.

Aetna sees the deal adding to its operating earnings in 2017. The combined company would have projected 2015 operating revenue of about $115 billion, with about 56% coming from government-sponsored programs like Medicare and Medicaid. Overall, as of March 31, the company would have more than 33 million medical members.

Humana offers a rapidly growing Medicare enrollment that totals 3.2 million–which, combined with Aetnas Medicare membership of 1.26 million, would give the merged company the biggest market share in the program, ahead of current leader UnitedHealth, they said. The Medicare business is seen as a growth engine for the industry, as baby boomers age into eligibility and choose the private-insurer version of the government program, known as Medicare Advantage plans.

Humana performs strongly in a key measure of Medicare quality known as star ratings, which are tied to government payments. The Louisville, Ky., insurer has been moving rapidly to forge close ties with doctors and other providers in efforts to boost performance and rein in costs. Humana also is a leading provider of Medicare drug benefits, known as Part D plans, with 18% of that market, according to a tally by Wells Fargo Securities.

A deal will be particularly high-stakes for the federal government because of Humanas key role in Medicare and its significant footprint in the health laws insurance exchanges.

A Wall Street Journal analysis found that an Aetna-Humana tie-up would increase by about 180 the number of US counties where at least 75% of customers for Medicare Advantage plans are in the hands of a single insurer. In eight states, an Aetna-Humana merger would remove a competitor from the exchanges where individuals can buy coverage under the Affordable Care Act, though insurers may not offer plans in every region of a state.

Goldman Sachs health-insurance analysts, looking at potential market-concentration issues, estimated that around 13% of the combined Aetna-Humanas Medicare Advantage enrollment could be at risk of divestiture if the two companies sought to merge. The analysts estimated the figure at around 18% of the combined individual-insurance business and 16% of small-group plan enrollment, though some states were excluded from those tallies.

In recent months, Humana has shown signs of operational snags.

Humana has missed analysts earnings projections for the past three quarters. It has warned of a possible uptick in hospital utilization among its Medicare members, and it has disclosed a Justice Department probe into how Medicare Advantage insurers score the health risks of their members, which impacts their payments.

Humana also has struggled with its business on the health laws marketplaces. Recently, when the Obama administration released calculations of health-insurer payments for 2014 under Affordable Care Act programs designed to help insurers that enrolled a lot of sicker, costlier consumers, Humanas allotment appeared to come in significantly short of its projections. The amounts made public so far arent complete yet, however.

The deal is a capstone for Mr. Bertolini, as it likely ensures that Aetna will endure in an industry that many experts think could shrink soon to just three major players at the top. Aetnas revenue last year totaled $58 billion, while Humanas was $48.5 billion. The current No. 2 insurer by revenue, Anthem, had $73.9 billion, while UnitedHealths was $130.5 billion, including its health-services arm, Optum.

A tie-up turns eyes toward Cigna, which would end up considerably smaller than its peers with revenue of $34.9 billion and business largely focused on self-insured employers, along with a significant overseas presence.

During the last major round of insurance-industry deal-making, Mr. Bertolini picked up Coventry Health Care Inc., closing that acquisition in 2013. That left Aetna with a bigger individual-insurance business, as well as increased Medicare and Medicaid, but it didnt reshape Aetna the way the Humana acquisition would, tipping a company long known for its employer business far deeper into the government space.

A completed deal also would mark the end of Humana as a stand-alone company, where it has long been a prominent name in the health industry and a key presence in its hometown, Louisville. Humana was once a major health-care provider, but it spun off its hospital unit in 1993. Longtime former Humana CEO Michael B. McCallister, who took over the company when it was struggling in 2000, is credited with steering it deeply and successfully into the Medicare business, which has remained at the center of the company.

Aetna said Friday that it would make Louisville the headquarters for its Medicare and Medicaid businesses, and maintain a significant presence there.

(By Liz Hoffman, Dana Mattioli and Anna Wilde Mathews)

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