Anthem, the nation's
second largest health insurer by revenue, will acquire Cigna, the nation's
fifth largest, the companies announced
Friday, creating a health insurance behemoth that raises fresh questions
about competition in the industry.
The $54.2 billion deal will
create the largest private health insurer as measured by the number of members.
It values Cigna at $188 per share, a 38 percent premium from its closing
price of $154 a share on Thursday. Cigna shareholders will receive a
combination of stock and cash in the transaction.
A merged company would
serve 53 million people and is part of a dramatic, long-predicted reshaping of
the health insurance landscape from five big players to threet. The new company
is projected to generate $115 billion in annual revenues.
has more than 45 million members, and Aetna and Humana announced they
would merge in July,
creating a company serving 33 million people.
While the major trend of
consolidation is the same in these big health care deals, analysts said
there are key differences between them. Aetna's deal to buy Humana greatly
expanded its presence in the Medicare Advantage marketplace, whereas the Cigna
and Anthem merger will have the biggest ripple effects for the commercial
insurance market, where both companies are already major players.
"The consolidation of
the largest insurers will certainly reduce competition, leaving employers with
fewer options for finding a low-priced plan for employees,"
Paula Wade, analyst at Decision Resources Group wrote in an e-mail.
The deal is a ripple effect
of the Affordable Care Act, which changed how insurance companies make money.
Analysts say that because of new caps on the profit that insurers can make on
their plans, the companies have been looking to cut administrative costs by
increasing their scale. They will be able to cut redundant departments and also
may be able to make investments in new technology more efficiently. The larger
companies will also have increased clout in negotiating rates with hospitals
and doctors groups.
“We believe that this
transaction will allow us to enhance our competitive position and be better
positioned to apply the insights and access of a broad network and dedicated
local presence to the health care challenges of the increasingly diverse
markets, membership, and communities we serve,” said Joseph Swedish, president
and chief executive officer of Anthem, in a statement. He will remain chief
executive of the new firm.
"Going forward our new
company will deliver an acceleration of innovative and affordable health and
protection benefits solutions that help address our health system's challenges
and provide supplemental insurance protection, and health care security to
consumers, their families, and the communities we share with them," said
David M. Cordani, president and chief executive officer of Cigna.
Anthem is parent to the
well-known Blue Cross and Blue Shield plans in 14 states and a Medicaid plan
called Amerigroup in 19 states. Cigna, meanwhile, has well-known insurance plans
in the United States and globally. The combined firm will serve
individuals, employees and governments. It will close in late 2016, pending
Federal and state regulators
are likely to scrutinize both of the deals closely, although the companies have
argued that the mergers will benefit consumers. The effect on competition will
likely vary by geographical market, and possible anti-trust concerns could
arise in some areas where the combined companies might control too large a
share of the market.
Wade cited the example
of Connecticut, where Anthem already holds 35 percent of the commercial
market share. Adding Cigna brings their market share to just over half.
"Where an employer might
have had his choice of Anthem, Cigna, UnitedHealth and Aetna, after these
mergers he’s only got three companies from which to choose," Wade said.
Some analysts say that the
growth of insurance premiums will slow because the industry is regulated
and the new companies will be more efficient. For example, Anthem and Cigna are
expected to save $2 billion a year from the much larger company within two
years, Swedish said Friday morning. Whether those savings trickle down to
consumers 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, chair of the health
care department at Proskauer, a law firm. "It will take some time to see.
... Is there still sufficient competition in the various markets that it won’t
lead to price increases?"
A 2012 study of
the 1999 merger between two large insurers, Aetna and Prudential, found that
premiums rose by seven percentage points. Another study in
the American Journal of Health Economics found that having more insurers in the
marketplaces set up by the Affordable Care Act brought the cost of premiums
“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," Steven J. Stack, president of the American
Medical Association said in a statement.
Source: Washington Post
Image Source: Washington Post. The Anthem logo hangs at the
health insurer's corporate headquarters in Indianapolis. (AP Photo/Michael