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Anthem-Cigna merger under powerful microscope

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Health insurers Anthem Inc. and Cigna Corp. could struggle to gain regulatory approval of their proposed $54 billion merger, especially if the deal is weighed against other large-scale transactions in the industry.

Should it win U.S. Justice Department, Federal Trade Commission and state insurance regulator support, Anthem's acquisition of Cigna — expected to close in the second-quarter of 2016 — would establish the nation's largest publicly traded health insurer by medical membership, covering an estimated 53 million people.

That support is far from guaranteed, however, and the health insurers may have to shed parts of their business to win it.

On its own, industry experts said the proposed merger of Anthem and Cigna would present federal antitrust regulators with few material threats to market competition on a national level, though they represent the country's second- and fifth-largest publicly traded health insurers, respectively.

“Our point of view is that on a market-by-market basis, it can become problematic. I don't think that necessarily translates to a nationwide red flag that would prevent the merger between Anthem and Cigna,” said Will Hinde, a senior director at Chicago-based M&A consultant West Monroe Partners L.L.C.

However, viewed in tandem with rival Aetna Inc.'s recent $37 billion merger agreement with Humana Inc. that is intended to close in late 2016 — as well as St. Louis-based health insurer Centene Corp.'s proposed acquisition of Woodland Hills, California-based Health Net Inc. for $6.3 billion — experts said regulators may be more stringent in examining the Anthem/Cigna deal's potential to dampen health insurer competition.

“It's possible that because you have so much activity going on, maybe Anthem falls victim to that,” said Ed Kaplan, New York-based senior vice president and national health practice leader at The Segal Group Inc. “If it was just this one deal, maybe regulators would be a little bit more lenient, but I would think that they're going to take a closer look at the Anthem/Cigna deal because of those other transactions.”

The timing and specifics of the regulatory reviews, on which the Justice Department and FTC declined comment, are not certain (see box, page 1).

Among issues Anthem and Cigna will need to address are market overlaps in their books of business. Both draw substantial revenue from commercial enrollments, including employer-sponsored group health plans. Additionally, Cigna operates in six of the 14 states in which Anthem operates as a member of the Blue Cross/Blue Shield Association, as well as several other states where it would find itself at odds with independent Blues members, experts said.

“I think in terms of the product markets, a combined Anthem and Cigna presents a very large problem in the commercial markets,” said Rob Fuller, of counsel at Los Angeles-based law firm Nelson Hardiman L.L.P. “The companies will have some efficiency arguments if they're challenged on that issue, particularly on things like analytics, underwriting and other background functions. But that's why Cigna was attractive to Anthem in the first place, because it's accretive to their existing commercial business, not because it necessarily opens them up to new product lines.”

Experts said another regulatory hurdle that both deals likely would have to clear is how they would affect competition in public health insurance exchanges established under the health care reform law.

At minimum, Mr. Fuller said he expects “attorneys general to become active in states that are running their own insurance exchange under health care reform, because they would have a vested interest in making sure there were sufficient competitors in their exchanges in order to maintain pricing.”

Those states include California, Connecticut and Colorado.

After announcing the proposed merger last month, Anthem and Cigna executives said they expect the deal to pass federal antitrust and state reviews.

“We believe there is a consensus of where there is overlap between our companies and that no substantive regulatory issues are present that would prevent completion of the transaction,” Wayne DeVeydt, Anthem's executive vice president and chief financial officer told analysts during a July 24 conference call.

Mr. DeVeydt said although Anthem has agreed to a breakup fee of 3.8% of the proposed deal's value — about $1.85 billion — if it cannot earn regulatory approval, “we have many levers to pull before we would get to that point.”

“That sizable breakup fee incentivizes Anthem to battle legally, if needed, to push the deal through, even as the Justice Department may be considering this deal and the Aetna-Humana merger simultaneously and may be concerned about the implications of health insurance industry consolidation from five down to three major players,” said John Maloney, market strategy director at Bloomberg BNA, a legal research subsidiary of Bloomberg L.P.

In a CNBC interview last week, Cigna President and CEO David Cordani said the companies expect the regulatory review to last 12 to 18 months.

“We will fully engage with state leaders and federal leaders,” Mr. Cordani said. “We're used to dealing in a transparent environment, and those conversations have already started. The key is going to be to demonstrate that health quality could improve and affordability will improve. Also critical to that, based on the way the country is evolving, moving from the more discount- or volume-based reimbursements to value-based reimbursements is mission critical, and this combination will help to further accelerate that.”