Coverage: Health care consolidation rejected

The health care industry is ready for consolidation, and the changing landscape could affect customers’ choices for how they’re insured. Over the weekend, Cigna rejected an offer from Anthem to be bought out. But the story doesn’t end here.

The New York Times story by Michael J. de la Merced and Reed Abelsom had these details:

The world of American health insurance may soon become even smaller, with the biggest companies seeking to become even bigger.

A scramble has broken out within the industry as various providers jockey for position and make overtures to rivals. Anthem made the first public move, unveiling a $47 billion takeover bid for Cigna on Saturday after months of negotiations had stalled. On Sunday, Cigna fired back, rejecting the bid as “inadequate and not in the best interest of Cigna’s shareholders.”

But others have been quietly maneuvering as well. UnitedHealth Group, the biggest American health insurer by revenue, recently made a preliminary approach to Aetna, a person briefed on the matter said.

And a number of companies have indicated their interest in buying Humana, one of the smaller major insurers but one with a valuable Medicare franchise. Among those companies that had expressed interest is Anthem, though the bigger insurance provider is currently focused on combining with Cigna, people briefed on the company’s plans said. Another is Cigna.

Jackie Wattles wrote for CNN Money that negotiations between the two companies weren’t going well:

In a harshly worded letter to Anthem released late Sunday, Cigna called Anthem’s offer “inadequate” and accused Anthem of refusing to address key issues raised in recent talks between the companies.

“We are deeply disappointed with your recent actions,” Cigna wrote. “[Y]ou have chosen to abruptly take us off our once productive path.”

Rumors that Anthem and Cigna (CI) were in talks have been circulating for months, but apparently had not advanced far enough for a deal.

In an apparent move to up the pressure, Anthem took its offer public on Saturday. It announced that it was offering to buy Cigna at $184 per share, which is 18.7% more than Cigna’s closing price on Friday.

Anthem said the offer would value the combined company at $53.8 billion.

The USA Today story by Mike Snider pointed out this was the fourth bid by Anthem:

The most recent offer, which Anthem said was of $184 per share in cash and stock, “is inadequate and not in the best interests of Cigna’s shareholders,” said Cigna Corp. president and CEO David Cordaniand the company’s chairman of the board Isaiah Harris in a letter sent to Anthem’s board of directors in Indianapolis.

Anthem (ANTM) has made four bids this month for the Connecticut-based firm. On Saturday, Anthem said in a statement that it raised the offer in response to Cigna’s requests, but could not guarantee that Cordani would be CEO of the combined company.

But Tony Cook wrote for the Indy Star that many in the industry believe the deal will eventually go through:

In a note to investors Saturday evening, analyst Ana Gupte of Leerink Research said “we expect that while (Cigna) may negotiate for a modestly higher price, that this deal will be consummated.”

Rumors about a possible mega-deal between the two companies have been circulating for a week.

Anthem disclosed Saturday that the two companies have been in talks since August 2014. Since June 3 this year, Anthem has submitted four acquisition proposals with purchase prices ranging from $174 per share to $184 per share, Swedish said in his letter.

Anthem’s takeover bid represents the latest evidence that the health-insurance industry is on the verge of a major consolidation.

Such a move could give Anthem even more leverage in an industry that is undergoing huge change and watching enrollments grow under the Affordable Care Act.

The Wall Street Journal had an analysis of the pending mega mergers and what they could mean for the industry in a story by Anna Wilde Mathews and Christopher Weaver:

Some of the combinations could pose challenges to competition around the country, according to the Journal’s analysis. For instance, an Aetna-Humana tie-up would increase by about 180 the number of U.S. counties where at least 75% of customers for Medicare Advantage plans are in the hands of a single insurer.

In addition, in eight states, an Aetna-Humana merger would remove a competitor from the exchanges where individuals can buy coverage under the Affordable Care Act. A UnitedHealth-Aetna tie-up, meanwhile, would remove a competitor in exchanges involving 11 states. Insurers may not offer plans in every region of a state, however.

Insurers will be able to point to operational efficiencies they can glean from consolidating, as well as better deals with health-care providers, which could result in lower costs for customers. Hospitals themselves have been merging at a rapid pace. Many experts have said that the provider consolidation can drive higher rates—and that more-powerful insurers might have a better chance of countering them and striking pacts for new forms of payment that incentivize efficiency.

The new laws are having far reaching affects across the health care industry, meaning that consolidation could decrease choices for consumers. It could also limit the number of companies for investors, making the space a tougher one to find returns.