Anthem may look for last-ditch options after Cigna merger rejected

(Updated at 4:30 pm ET)

It was the $54 billion deal that wouldn't die. But on Friday morning, the proposed merger between national health insurers Anthem and Cigna Corp. was once again shot down.

The U.S. Court of Appeals for the D.C. Circuit upheld a lower court ruling from February that blocked the two insurers from merging on grounds that the combination would harm competition, particularly in the national employer market.

Two judges on the three judge panel said the district court didn't err in its findings.

"We hold that the district court did not abuse its discretion in enjoining the merger based on Anthem's failure to show the kind of extraordinary efficiencies necessary to offset the conceded anticompetitive effect of the merger in the 14 Anthem states: the loss of Cigna, an innovative competitor in a highly concentrated market," the opinion, penned by Judge Judith Rogers, states.

Judge Brett Kavanaugh dissented, saying the merger would provide cost savings for the large employers that obtain insurance services from Anthem and Cigna.

Anthem and Cigna could appeal the decision and request a hearing en banc at the D.C. Circuit. Anthem did not respond to requests for comment on whether it plans to push the court for an en banc hearing.

Anthem CEO Joseph Swedish told investors earlier this week that the company would evaluate its options depending on how the appellate court ruled. Swedish added that the company remained committed to the merger.

Cigna declined to comment beyond its Friday filing with the Securities and Exchange Commission, which said it "continues to work through the litigation process in the pending Delaware Court of Chancery matter."

Andrea Murino, a partner and co-chair of the antitrust group at law firm Goodwin Procter, said she would expect Anthem to request a hearing en banc, having fought for the merger for so long, and it doesn't take much effort to do so.

The fact that the insurers' attorneys successfully convinced the widely respected Judge Kavanaugh of the merits of their merger leaves open a window of possibility that other D.C. Circuit judges could also be persuaded, Murino said. "I don't think that Anthem's chances of success are huge, but they are not zero."

In the Delaware court, Cigna is fighting for the right to end the merger agreement and collect a $1.85 billion break-up fee, along with $13 billion in damages from the failure of the merger. Both Cigna and Anthem argued that the other breached the merger agreement.

Anthem in February successfully secured a temporary restraining order barring Cigna from bowing out of the deal. A preliminary injunction hearing is scheduled for May 8 in the Delaware court.

The Department of Justice, which sued to block the Anthem-Cigna deal in July 2016 along with 11 states and the District of Columbia, celebrated the appellate court's decision.

It "confirms the district court's conclusion that the merger would not have provided real benefits to consumers, but instead would have harmed competition in these important markets," Deputy Assistant Attorney General Brent Snyder of the Justice Department's Antitrust Division said in a statement.

Provider organizations, including the American Medical Association and the American Hospital Association, applauded the decision. "The appellate court sent a clear message to the health insurance industry: a merger that smothers competition and choice, raises premiums and reduces quality and innovation is inherently harmful to patients and physicians," AMA President Dr. Andrew W. Gurman said in a statement.

Judge Rogers, joined by concurring Judge Patricia Millett, largely embraced the district court's reasons for blocking the merger. Ultimately, U.S. District Judge Amy Berman Jackson concluded in February that the combination of Anthem and Cigna would harm customers in the national accounts market within the 14 states where Anthem operates under the Blue Cross Blue Shield brand, and in at least one local market.

The crux of Anthem's argument was that the combined merger would produce medical cost savings of $2.4 billion that could be passed onto its plan members. Jackson rejected that claim.

Likewise, the appeals court wasn't convinced the combined company would secure those cost savings. "Those projections fall to pieces in a stiff breeze," Rogers wrote in the majority opinion.

Healthcare providers could push back against Anthem's attempts to strong-arm them into accepting lower rates. Moreover, the court questioned whether Anthem would pass any savings onto the customer, given that internal company documents showed Anthem would rather pocket them.

The appeals court also worried that the merger would harm the innovation Cigna is known for in wellness and value-based care arrangements.

In his dissenting opinion, Kavanaugh said "the merger would not substantially lessen competition in the market for the sale of insurance services to large employers," but would save those employers substantial costs. He noted that large employers would save $1.7 billion to $3.3 billion annually stemming from lower rates from the combined mega-insurer.

"There is little basis to doubt that the cost savings or employers as a result of the merger would be large — and far larger than the increased fees charged by insurers to employers as the result of the merger," Kavanaugh wrote in his dissent.

Rogers labeled Kavanaugh's opinion as "superficial" and "not well founded." She argued it failed to recognize that lower prices could lead to reduced product quality. She also questioned his blind trust of Anthem's cost savings estimates.

"Pulling at any one loose thread quickly unravels Anthem's narrative, but the dissent is simply unwilling to do so," Rogers wrote.

The insurers initially struck up the deal to merge in July 2015. The relationship between the Anthem and Cigna executives turned sour almost immediately. From the beginning, Swedish and Cigna CEO David Cordani bickered over who lead the combined company. They eventually settled on Swedish.

Things got uglier in 2016 when news reports unveiled behind-the-scenes squabbles between the two companies' executives. Both companies argued that the other violated its merger agreement. Antitrust experts wondered at the time if the squabbles would harm the insurers' chances of closing a deal.

After the Justice Department sued to block the tie-up, Cigna's commitment to fighting the lawsuit appeared lukewarm at best. Jackson described the animosity between the two companies as the "the elephant in the room" in her opinion, adding that Cigna officials were "actively warning against" the merger.

Anthem immediately appealed Jackson's decision, while Cigna tried to end the merger agreement. Anthem had hoped to settle with the new Justice Department under the Trump administration, which many experts believed would be more lenient on antitrust matters than the Obama administration had been. So far, however, the Justice Department has maintained its opposition to the tie-up.