Anthem acquiring Cigna in largest-ever health insurance deal: $54.2B

(Story updated at 12:45 p.m. ET.)

Anthem will acquire Cigna for $188 per share, the health insurance companies announced Friday. The deal, including Cigna's debt, will be worth $54.2 billion. It is the largest-ever health insurance transaction, and part of the mass-scale merger race that is fundamentally changing the industry and fueling concerns over costs and competition.

The definitive agreement comes a little more than a month after Indianapolis-based Anthem went public with an offer of $184 per share, which Bloomfield, Conn.-based Cigna rejected. The two sides had sharp disagreements over who would lead the combined company, which will have $115 billion in revenue if Anthem receives required approval from its sponsor, the Blue Cross and Blue Shield Association.

“This transaction better serves us to benefit the evolving healthcare market,” Anthem CEO Joseph Swedish said on a call Friday morning. Swedish will serve as Anthem's chairman and CEO, and Cigna CEO David Cordani will become Anthem's president and chief operating officer. Swedish will scale back on his role as Anthem's chairman after two years. Executives did not say if Cordani would succeed Swedish as the top executive.

The merger of Anthem and Cigna, expected to close in the second half of 2016, will bring the private health insurance market from five big players down to three.

UnitedHealth Group will remain the largest by revenue, projecting $154 billion this year. However, Anthem will have a larger customer base. Anthem will have 53 million medical members, compared with UnitedHealth's 46 million. The combined Aetna and Humana company, a deal announced earlier this month, will have 33.4 million health plan members and $115 billion in revenue.

The Affordable Care Act has put pressure on health insurers to cut costs and improve care coordination, which analysts believe ignited the current firestorm of mergers and acquisitions. But the ACA has also pushed for more insurance competition, especially in the public exchange markets. Some in the industry believe the spate of deals, which also includes Centene Corp. and Health Net, runs directly counter to that goal.

“The purpose of Obamacare was to provide a breadth of competition to healthcare markets in which there was too much concentration,” said David Balto, an antitrust attorney who formerly worked for the Department of Justice and the Federal Trade Commission. “Permitting these mergers would be a giant step backwards.”

Because of the sheer size of these companies, state and federal antitrust regulators will likely examine the deals closely. But Anthem Chief Financial Officer Wayne DeVeydt said his company is “confident” the transaction will get the green light from everyone.

Joshua Raskin, an analyst at Barclays Capital, said he believes the Anthem and Aetna deals will ultimately go through, since all parties involved have legal advisers on board who likely have anticipated such questions. However, Anthem and Aetna may have to divest some of their health plans to maintain local competition, especially in the private Medicare Advantage market, Raskin said.

But Balto isn't as sure the government will acquiesce. The Obama administration has taken an acutely critical eye toward recent mergers. Proposed deals between Time Warner Cable and Comcast, and between Sysco Corp. and US Foods were terminated because of federal antitrust scrutiny.

Anthem and Cigna control large portions of the employer market in several states, including Georgia, Indiana, New Hampshire and Virginia. “When you add Cigna's membership in, it goes from dominant to super-dominant in some of these markets,” said Paula Wade, an analyst at consulting firm Decision Resources Group.

Many observers also believe insurance mergers are creating a “cyclical arms race” that will spur more consolidation among providers. Hospitals have scooped up physician groups and other hospitals at a feverish pace during the past five years, which some economists believe has negatively resulted in higher prices. The insurance deals are viewed as a way for payers to regain negotiating leverage over providers, who don't want to be left out of insurance networks, said Angela Humphreys, chair of the healthcare practice at law firm Bass Berry & Sims.

About 55% of the deal will be financed through cash, and the remaining portion will be funded by shares of Anthem's stock, Swedish said. Anthem's debt-to-capital ratio will be at almost 50%, far above industry averages, with the goal of reducing it to 42% within the next two years.

Two-thirds of the combined company's revenue will come from commercial contracts called administrative services only. In ASO contracts, self-insured employers pay medical claims on their own and pay the insurance company to manage the back-end work and provide stop-loss coverage to protect against catastrophic claims.

About 15% of revenue will come from Medicaid and Medicare members, and Anthem will also be gaining Cigna's growing international business.

If Anthem or Cigna aborts the deal, a $2 billion break-up fee would go into effect. Shareholders must approve the deal as well.