How would a $48B Anthem-Cigna merger affect rates?

The proposed merger of Anthem Inc. and Cigna Corp. would create a health insurance giant with unparalleled clout in the commercial health insurance business.

Indianapolis-based Anthem’s proposed $48 billion takeover of Cigna, announced Friday, would be industry-altering, say doctor groups, hospitals and health experts — and federal regulators are expected to closely scrutinize its effects on compeition.

Some say a combined Anthem-Cigna would wield more power to dictate prices and terms to health providers and consumers than any insurer ever has had.

“As large as Anthem is, they already hold the big stick in any negotiation over rates. What you’re going to see is that stick get much bigger,” said Paula Wade, principal analyst at Decision Resources, a health-care market analysis firm in Nashville, Tenn.

The proposed deal is expected to take more than a year to complete. It would combine the nation’s second- and fourth-largest insurers by enrollment and create the largest U.S. health insurer by membership, with about 53 million medical members.

It would be by far the largest in a long string of acquisitions for Anthem, which began life in the mid-1940s as two Indianapolis mutual insurers that later merged into a one-state Blue Cross-Blue Shield licensee.

Under terms of the deal, Anthem would keep its name and its Indianapolis headquarters, where it has corporate offices on Monument Circle, Anthem spokesman Tony Felts said. Anthem would retain Cigna’s Bloomfield, Conn., corporate offices. But the companies haven’t worked out integration details such as how many Cigna corporate staff or functions might be transferred to Indianapolis, Felts said.

The Anthem-Cigna announcement follows a similar merger proposed three weeks ago among two other top-five national insurers. Aetna outlined a $35 billion bid for Louisville, Ky.-based Humana Inc.

The two deals would alter the landscape of U.S. health care and reduce the five giant U.S. health companies to just three, including UnitedHealth Group of Minnetonka, Minn.

President Barack Obama’s lankmark Affordable Care Act, which overhauled health-care markets, is seen as a trigger for the consolidation. National insurers want to become larger to gain clout to negotiate with government and regulators, and hospitals and doctor groups that are themselves consolidating.

However, the two mega-deals announced this month are going to be scrutinized heavily by federal and state regulators, who want to ensure companies don’t gain so much power that they can dominate regional markets.

The Justice Department’s antitrust division might end up forcing Anthem or Cigna to sell off pieces of their business in order to get approval for the merger, said Matthew Cantor, an antitrust partner at the New York law firm Constantine Cannon LLC.

Cantor thinks that the ongoing political debate over the virtues of the Affordable Care Act will result in the Justice Department giving the merger extra scrutiny.

“The Affordable Care Act is already a political football. In light of the (Obama) administration’s concern that insurance premiums do not go up ... they are going to give it significant review.”

Both companies’ stocks fared poorly in trading on the New York Exchange Friday. Anthem’s stock price fell nearly 3 percent, or $4.35 a share, to $150.86. Cigna stock plunged 5.6 percent, or $8.64 a share, to $145.72.

Financial experts have pointed to the uncertainty of antitrust approval as one reason Cigna’s shares are trading well below the $188-a-share agreed-upon offer.

Anthem's CEO Joseph Swedish tried to assure stock analysts in an hourlong teleconference that Anthem and Cigna officials can overcome the antitrust and other merger hurdles.

“I think it’s probably no secret, this incredibly large-scale transaction puts out there tremendous execution risk,” he said. “Our sense is that we've got our arms around the integration challenges.”

In the conference call and in their announcement, Anthem and Cigna officials said their merger will result in a company with a much broader base over which to spread costs and expenses, and a greater ability to innovate and use technology to benefit patients and providers.

“Together, Anthem and Cigna can unlock this potential” for new treatments, technologies and clinical discoveries to help patients, the companies said. Anthem and Cigna set up a special website, betterhealthcaretogether.com, to outline their merger plans.

The merger would allow the companies to realize $2 billion in savings, they said, though it would cost $600 million to mesh the two firms’ vast networks. A combined Anthem-Cigna would have total revenue of more than $115 billion.

Anthem officials contend that a Cigna merger would create a more balanced, diversified company. It would build on Anthem’s Medicare Advantage enrollment in states such as Texas and Florida. Medicare Advantage plans are privately run, fast-growing versions of the federally funded program for people over age 65 and the disabled.

Cigna also sells group disability and life coverage in the U.S., and it has a growing international segment that Anthem lacks.

The impact the two big insurance acquisitions might have on consumers likely won't be felt for more than a year, because insurers have already finalized most of their plans for coverage that starts in January.

Mike McCaslin, a principal in the health-care division of Somerset CPAs in Indianapolis, said he’s skeptical that the big mergers will lower insurance rates.

“It’s a little scary for health-care providers,” he said. “The fewer the payers, the easier it is for them to say, ‘This is all we’re paying.’

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McCaslin compared the consolidation in big health-care companies to airline mergers in recent years that have resulted in higher ticket prices and fewer choices for passengers in many markets.

Larry Levitt, a senior vice president at the Kaiser Family Foundation, a health policy research group in California, shared that skepticism.

“Insurers are looking to consolidate to benefit insurers, the motivation is not to help consumers,” he said.

In many states, the impact of the mergers on individual insurance markets — where policies are sold on state exchanges set up by the federal government — might be minimal, according to industry experts. The exchanges, after more than a year in existence, are still highly competitive in most markets.

In Indiana, for instance, at least nine carriers offer individual coverage. “There’s substantial competition there,” said David Kelleher, who just stepped down as executive director of Employers Forum of Indiana.

The biggest impact from the merger in Indiana would likely be seen on employer-bought insurance. In this so-called commercial market in Indiana, Anthem has a 35 percent share and Cigna has 11 percent. Combined, the two would wield almost a dominant position, Wade, of Decision Resources, said.

“That’s a great deal of concentration in a pretty large market,” she said, and would limit the choices of employers as they hunt for affordable insurance for their workers.

Because the state is dominated by a handful of large health benefit companies, Indiana is one of nine states where the Anthem-Cigna merger should be seen as an anti-competitive event for the commercial insurance market, said the American Medical Association.

“The lack of a competitive health insurance market allows the few remaining companies to exploit their market power, dictate premium increases and pursue corporate policies that are contrary to patient interests. Health insurers have been unable to demonstrate that mergers create efficiency and lower health insurance premiums,” said Dr. Steven J. Stack, the AMA’s president.

Kaiser’s Levitt said the Affordable Care Act dictates that if insurers don’t spend 80 percent of policyholder premium revenue on health care expenses for patients, they have to provide consumers with rebates.

But healthcare consultant McCaslin notes that insurers wield clout in more ways than pricing, and they’re willing to use it. As companies get bigger, he said, “I could easily see them pushing more risk to providers,” by tactics such as capping payouts on employer policies and forcing employers to cover any over-the-cap claims.

The courtship of Cigna took more than a year of negotiations. Figuring out how to structure the deal was complex, both companies said.

Including debt, the deal is valued at $54.2 billion, or $188 per Cigna share. Shareholders of Cigna will receive $103.40 per share in cash and 0.5152 shares of Anthem stock for each of their shares.

The deal is targeted to close in the second half of 2016. Cigna stockholders still need to approve the agreement, and Anthem shareholders need to approve the issuance of shares in the transaction.

Anthem stockholders will own about 67 percent of the combined company, with Cigna shareholders owning 33 percent.

The Anthem board will expand to 14 members. Cigna's President and CEO David Cordani and independent directors from Cigna's board will join the nine members of Anthem's board.

Cordani will serve as president and chief operating officer of the combined business, with Anthem's Swedish as chairman and CEO. Who would hold the top spot was reportedly a point of contention in the merger talks.

Anthem, headed since 2013 by Swedish, was created through a series of acquisitions carried out by his predecessors from the late 1980s on. It grew mostly by buying Blue Cross-Blue Shield plans in other states, then capped off its buying spree in 2004 by purchasing one of the nation's largest insurers, WellPoint Health Networks of California.

Anthem’s last major acquisition was Amerigroup, a government health care provider, in 2012 for $4.5 billion.

The Associated Press contributed to this report.

Call Star reporter Jeff Swiatek at (317) 444-6483. Follow him on Twitter: @JeffSwiatek.