As big health deals bloom in July, Anthem is buying Cigna for $48 billion

The merger wave in health care gained momentum Friday with the announcement that Anthem is buying rival Cigna for $48 billion. The deal, if regulators approve it, will create the nation’s largest health insurer by enrollment, covering about 53 million U.S patients.

In just three weeks, starting with Aetna’s $35 billion bid for Humana on July 3, the landscape of health care has been altered in a buyout frenzy that could transform five massive health companies into just three, including UnitedHealth Group with more than 45 million members. The merged Aetna and Humana would have 33 million members.

Larger insurers have negotiating power to squeeze better rates from drug companies and health care providers. But the wave of consolidation could lead to fewer choices for consumers in certain markets. Regulators scrutinizing the two megadeals will be trying to assess whether these combined companies would have so much power that they could dominate markets and drive already high health care costs even higher.

Some key points about the deals:

▪ This is a ripple effect of the Affordable Care Act.

The biggest insurers have been looking to get even bigger largely as a result of Obamacare, which changed the terms on which these companies can compete. Because of caps on the profits they can make from plans, health insurers are looking to use economies of scale to become more efficient. That means they can eliminate administrative redundancies — they don’t need things like two human resources and two actuarial departments. The Aetna-Humana deal was projected to result in $1.25 billion in savings annually by 2018, for example. The Anthem-Cigna deal is expected to enable $2 billion in savings.

Dan Mendelson, CEO of Avelere Health consultants, said: “What they do is create more capable organizations that can spread fixed costs across a wider group of people and ultimately, if they can do that, they can really improve health care. And the reason why it doesn’t hurt things competitively is because at the local market you’re not creating consolidation to a problematic extent.”

In addition, as health care has become more innovative, it also requires upfront capital investments to support the technology infrastructure for services such as telemedicine or electronic health records — something that is more efficient for the megacompanies to do.

▪ The effects on premiums are hard to predict but are likely to be bad.

The question of how the mergers will affect card-carrying members is complicated. In general, consolidation in an industry leads to less competition and higher prices. Indeed, the few studies that have been done suggest that fewer insurers in the marketplace will mean higher prices.

But health care is a regulated industry in which the marketplace varies widely depending on where a person lives, making it harder to tell exactly what to expect. In theory, the new companies are going to be more efficient, and some analysts believe they will pass those savings on to consumers, slowing the growth in premiums at the very least. But much remains to be seen.

“The premise of the merger for both of these transactions is that they can achieve cost savings and economies of scale, and they of course maintain that will lead to their ability to price even more competitively,” said Richard Zall, head of the health care department at Proskauer, a law firm. “It will take some time to see (1) can they implement the mergers and achieve those savings and (2) is there still sufficient competition in the various markets that it won’t lead to price increases?”

▪ The effects on premiums are likely to depend on where you live.

Although these are big national companies, health care is also fundamentally a local business. That means that to understand the effects on consumers, it’s often necessary to look market by market to see in which areas the consolidation really changes the landscape.

▪ Regulators will be scrutinizing these deals.

The companies say these deals will make them more efficient and benefit consumers, but they are likely to get serious scrutiny from federal and state regulators. It could be that the combined companies would control too much of a certain local market, a typical concern for antitrust officials, though industry experts see few localities with substantial overlap.

Even if both big health care deals get regulatory approval, they are not expected to close until 2016. Integrating these giant companies will take time, possibly several years for the companies to realize the savings they expect and then pass them on to consumers — if they are passed on.

The Anthem-Cigna deal is valued at $54.2 billion, including debt. Shareholders of Cigna, based in Bloomfield, Conn., will receive $103.40 per share in cash and 0.5152 shares of Anthem stock for each of their shares. The companies put the total value at $188 per share.

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

Anthem, based in Indianapolis, is currently the nation’s second-largest health insurer, while Cigna ranks fourth in terms of enrollment. Anthem specializes in selling individual coverage and insurance to workers of small businesses. It also has grown its government business, which includes Medicare, Medicaid and coverage of federal employees.

Health insurance is Cigna’s main business, but it also sells group disability and life coverage in the U.S., and it has a growing international segment that Anthem lacks. Much of Cigna’s health insurance business involves coverage where the employer pays the claims and then hires Cigna to administer the plan, a growing and less profitable form of coverage in employer-sponsored health care.

This story was originally published July 24, 2015 at 3:28 PM with the headline "As big health deals bloom in July, Anthem is buying Cigna for $48 billion."