Cigna Corp. so far has rejected a tie-up with Anthem, but a deal may be only a matter of time given the growing need for scale in the health insurance market.
The two companies are reportedly back at the bargaining table after Cigna rejected a June bid from Anthem. The new cash and stock offer is said to be about $188 per share, or about $48 billion, according to the Wall Street Journal and New York Times.
Cigna had resisted Anthem's overtures despite what many see as a clear business case for size and scale in the post-healthcare reform environment. Insurers largely sat on the sidelines as healthcare providers rapidly consolidated across the country. Now the ball is in the insurers' court.
This and other proposed insurance mergers could increase the pressure on independent healthcare providers, which are concerned about losing leverage in payment negotiations and being shut out of narrow networks.
Although Anthem was the first to make a move with its June offer of $46.8 billion for Cigna, Aetna was the first insurance giant to cement a deal when it offered $37 billion for Humana earlier this month. Both deals are likely will face rigorous antitrust scrutiny before they are finalized. The two deals together could spur more M&A activity among both insurers and hospitals.
Cigna has been in lengthy negotiations with Anthem about a combination, but it balked at the June offer. In a letter to Anthem's board, Cigna's chairman and CEO outlined several key obstacles to a deal. Cigna expressed concerns about who would govern the new company and that the proposal offers little benefit to Cigna shareholders.
“You are, however, facing a number of major issues, including Anthem's lack of a growth strategy, complications relating to your membership in the Blue Cross Blue Shield Association and the related antitrust actions, and other significant challenges, such as the massive data breach you experienced in February,” the June 21 letter said.
Cigna may be in a better negotiating position than other insurers because its focus has been on the large group market and not the more challenging individual market, said Eric Wilson, principal at Wilson Associates, a consulting firm.
If Cigna is taken over by Anthem, it would be the 15th insurance company to leave the market since the Affordable Care Act was passed, either through a sale, divestiture, or going out of business, Wilson said. He pointed to companies such as Principal Financial, American Community, Guarantee Trust and Assurant Health as smaller players in the individual market that can no longer compete.
The business environment has gotten more challenging for insurers with new regulations such medical-loss ratio requirements—which set a floor for how much insurers must spend on medical claims and clinical improvements—standard benefit packages, and prohibitions against turning away applicants based on preexisting conditions or setting much higher rates for older, sicker people. Those rules make it even more important for insurers to achieve economies of scale, get their administrative costs in check, and gain more bargaining leverage with providers and drugmakers.
“I think when all is said and done, you're going to have three companies,” Wilson said. “They can't operate at these numbers and still make a profit.”
Hospitals, meanwhile, fear that insurance mergers will put pressure on payment rates and decrease their bargaining power. That impact, however, is likely to depend on the market and could be remedied by divestitures, said Richard Zall, a New York-based attorney who chairs the healthcare practice at law firm Proskauer.
The larger concern is that as big, powerful insurers increasingly adopt narrow network plans, some doctors and hospitals will be left out. Zall said the growing collaboration between insurers and providers on value-based payment and delivery reduces some of the tension. But as a smaller number of insurers roll out narrow network plans, providers face the risk “that the music stops and there isn't a chair for you.”
