Anthem faces showdown with antitrust cops in bid for Cigna

Anthem Inc. and Cigna Corp. are preparing for a showdown with senior Justice Department officials this week in their effort to persuade the government to allow the health insurers to combine, lest they wind up dueling in court over a $1.85 billion breakup fee, according to people familiar with the matter.  

The health insurers are set to meet Friday with the department’s No. 3 official, Bill Baer, according to one of the people, a critical moment as the government makes its decision about whether to approve or block the $48 billion deal that was proposed almost a year ago. This phase of a merger review can feel like a roller coaster ride, antitrust experts caution, with the outcome difficult to predict as companies jockey with enforcers in last-ditch meetings.

The insurers are facing a Justice Department that has taken aggressive stances against deals to protect consumers, challenging tie-ups in industries ranging from pay-TV to oil-field services. Baer’s decision on the Cigna takeover, along with a pending deal between Aetna Inc. and Humana Inc., gives the Obama administration another opportunity to shape the future of health care—pillar of the U.S. economy—after passage of the Affordable Care Act.

Government’s concerns

The challenge for Indianapolis-based Anthem and Bloomfield, Connecticut-based Cigna will be to counter the government’s concerns that the deal threatens to undermine competition and can’t easily be fixed by selling parts of their businesses, according to two of the people. The companies may assert that the merger would increase their ability to compete on the Obamacare heath insurance exchanges, a scenario viewed dimly by some administration officials, according to one person.

Baer has already swatted down one of the companies’ key arguments: that they need to bulk up to counter the growing market power of hospitals. Baer has also said the Cigna takeover, as well as Aetna and Humana’s deal, demand close scrutiny because of their potential to reshape the industry. On Wednesday, a group of Democratic senators, including Elizabeth Warren of Massachusetts and Richard Blumenthal of Connecticut, called for the Justice Department to oppose both transactions, saying they would raise health-care costs for consumers.

July decision

Anthem and Cigna are expecting a decision from the department as soon as July, although that timing could be extended. If the Justice Department decides the tie-up is anticompetitive and can’t be fixed, it would file a lawsuit in federal court seeking to block the merger. The companies are required to fight back under terms of their agreement.

Anthem said in a regulatory filing that it "continues to have a productive ongoing dialogue with federal and state regulators regarding the merits of this compelling combination." The Justice Department and Cigna declined to comment on the review.

The merger talks were troubled from the start. Cigna, based in Bloomfield, Connecticut, was a reluctant seller and tussled with Anthem over who would lead the business and what role David Cordani, Cigna’s chief executive officer, would play. A collapse of the deal over antitrust scrutiny could trigger further fighting between the companies over the $1.85 billion breakup fee. If the deal is blocked on antitrust grounds, Anthem must pay Cigna the fee, but Anthem could duck that payment if it establishes that a “willful breach” by Cigna led to the failure to get antitrust approval, according to the merger agreement.

Lost competition

Justice Department officials and state attorneys general are concerned that there may not be a way to restore lost competition caused by the tie-up, according to one of the people. That’s because of the shortage of viable competitors that could buy insurance plan members from Anthem and Cigna, the person said.

UnitedHealth Group Inc., one of the five biggest U.S. insurers, may be too big already to get a green light from the government to buy parts of Anthem and Cigna’s businesses. Meanwhile, Aetna and Humana—the other two insurers among the top five—are already grappling with antitrust scrutiny of their own deal. Smaller insurers may not have the scale to replace lost competition.

Officials are also worried about concentration among the major insurers that compete on a national scale by selling services to large employers, two of the people said. Some attorneys general caution that there are only a small number of insurers in their states and that the deal would leave consumers and companies with even less choice, one of those people said. The deal also needs approval from state insurance regulators. California’s insurance commissioner last week called on the Justice Department to block the deal.

Worried investors

Investors have grown increasingly worried about the deal’s prospects. The spread between Cigna’s share price and the offer price has increased by about 50 percent since the end of last year. Anthem shares, fell 2 percent on Wednesday, to $128.72 each, while Cigna rose less than 1 percent, to $127.90.

In Justice Department investigations of mergers, companies typically meet with senior leaders of the antitrust division at the end of the review. It’s an opportunity for the merging firms to respond to any concerns raised by staff lawyers. That makes the coming meeting a milestone in the process, two of the people said.

Baer, who has stopped a string of mergers during his tenure, told a group of antitrust lawyers last week in Washington that with the country’s largest health insurers combining, leading to “substantial consolidation” in the industry, antitrust enforcers “cannot afford to let up.”