Analysts expect Anthem-Cigna deal to unravel after Fed lawsuit

Hours after the U.S. government sued to block two major health insurance mergers, one deal appears headed for the courthouse while the other could be headed to the graveyard.

Within minutes of the Justice Department filing its case in federal court Thursday, Aetna Inc. and Humana Inc. issued a joint statement, promising they’d fight in lockstep and “vigorously defend the companies’ pending merger.”

It’s the sort of statement that’s typical at the start of such antitrust suits. Yet Cigna Corp. seemed to use a related lawsuit also filed Thursday as a potential escape from Indianapolis-based Anthem Inc.’s $48 billion takeover of the company.

Instead of a joint statement promising to fight, it quickly emailed its own comment to reporters, without Anthem, saying it didn’t know when a deal would close, “if at all.”

“Cigna is saying, ‘We’d like to walk,’” Ana Gupte, an analyst at Leerink Partners, said by phone. “If there’s any opportunity for a settlement between Anthem and Cigna around the breakup fee and being able to walk away, they will try to do that.”

Anthem declined to comment on Cigna’s comments Thursday, other than to say it was ready to challenge the department. If the deal falls apart under antitrust scrutiny, Cigna is owed a breakup fee of $1.85 billion, according to the companies’ agreement.

Deal drama

Thursday’s drama was the latest twist in one of the most consequential sets of deals in the U.S. health insurance industry. U.S. officials have said they want to block the mergers to preserve competition, while the companies say they need the transaction to control the cost of health care and push back against consolidating doctors and hospitals.

After Anthem first publicly approached Cigna in 2015, it was rejected by the insurer partly over what role Cigna CEO David Cordani would play at a combined firm. Strife between the companies has spilled out into the open again in recent months. Ironically, dysfunction between the two may end up being good for Aetna and Humana, since a key part of the government’s argument against the deals has been that they would shrink the five biggest players into three.

“If Cigna is terminated, then the notion of the five to three disappears, and it also makes the DOJ’s court case more difficult,” said Ira Gorsky, an analyst at Elevation LLC. He said there’s little chance that Anthem and Cigna are able to complete their deal.

A way forward for Aetna-Humana?

Aetna is already trying to find a way forward on its $37 billion takeover despite U.S. officials’ skepticism of the deals. The Hartford, Connecticut-based company is willing to offer up more divestitures to reach a settlement, CEO Mark Bertolini said in an interview Thursday. “We can settle tomorrow,” he said. “If there are more counties, we can put those on the table.”

Aetna and Humana may also be willing to play hardball, putting their participation in Obamacare in play. The Justice Department said Thursday that part of its reasoning was to preserve competition in the Affordable Care Act’s marketplaces for individual insurance.

Less than an hour later, Humana put out a statement announcing it would no longer sell plans in eight of the 19 states where it has been offering Obamacare plans. Humana CEO Bruce Broussard said the retreat was already in the works and not prompted by the DOJ announcement.

Money-losing exchanges

Bertolini said Aetna could re-evaluate its exchange presence as well. “Should this create a balance-sheet problem for us, we’re going to have to look at our competitive investments,” he said.

“The exchanges are a mess as they exist today,” Bertolini said. “They’re losing a lot of money for a lot of people.”

Outside the investment community, there’s less certainty that either of the deals has an easy path.

Kathleen Sebelius, the former Obama administration Secretary of Health and Human Services, said in an interview she wasn’t surprised to see the U.S. take action to block both deals. The Affordable Care Act was designed to promote competition among insurers, and the deals would reduce options both on the Obamacare exchanges and for consumers in other markets, she said.

“The historic evidence in health insurance is that less competition means higher rates and fewer choices.” she said.

While there’s still a chance the companies can get their deals through, it won’t be easy, Sebelius said. “This is a declaration that at least there’s a long way to go, if these are ever going to be approved,” Sebelius said.

Leemore Dafny, whose research has shown that a lack of competition can raise the cost of health insurance, said that based on the Department of Justice’s complaint, divestitures may not be enough. The companies should probably be considering whether to walk away, she said.

“I don’t think either of these parties are going to come up with a divestiture package that DOJ thinks would replace the competition,” said Dafny, a professor at Harvard Business School. “The possibility of a settlement is nonexistent”

Anthem shares were up 63 cents Friday morning, to $139.67 each, after rising more than $3.50 on Thursday.