A merger between major health insurers Cigna and Humana would go through the wringer of an intense antitrust review, but could come out finalized, experts say.
Though, to receive the regulatory green light, a combined company would probably have to emerge looking different from the Cigna and Humana of today.
The insurers are in talks to merge and could announce a deal by the end of this year, the Wall Street Journal reported on Wednesday. The stock of both companies tanked following the news as investors balked over the uncertainty of a deal review from increasingly aggressive antitrust regulators in the Federal Trade Commission and Department of Justice.
Analysts and industry experts agree a marriage between the two massive health insurers would face strict antitrust inspection. Already, Sen. Elizabeth Warren, D-Mass., has called on regulators to “carefully scrutinize” a potential merger.
Gaining regulatory approval — especially if a challenge further ties up the process in the courts — could set a deal’s finalization back by a year or more. But, due to a lack of direct competition between the two, Cigna and Humana could be allowed to combine, creating a healthcare powerhouse with roughly $300 billion in annual revenue.
“I think it’s probably going to get approved, if I were a betting person,” said Samantha Prokop, head of healthcare transactions at Florida law firm Gunster. “[Cigna and Humana] know what the regulatory scheme is, they know what they’re up against and they’re expecting to do it.”
The merger is a smart strategic play, experts said. It would build a large diversified managed care organization out of two companies with more narrow focuses today: Humana in Medicare Advantage and Cigna in employer-sponsored plans. Along with gaining significant scale in MA, Cigna’s pharmacy benefit manager could bring in Humana’s covered lives, increasing its purchasing power for drugs.
Experts noted that other major U.S. insurers like UnitedHealth, CVS and Elevance all have highly diversified businesses —much of them built through acquisitions — so there’s plenty of regulatory precedent to allow Cigna and Humana to merge.
“The FTC is fairly hypocritical over its lifespan. It’s allowed [UnitedHealth] to get to what it is,” said Nathan Ray, healthcare M&A lead at consultancy West Monroe. “It’s created a whole new tier of payer size one could argue mergers like this are necessary to compete with.”
‘An incredibly hard deal to get through’
Historically, regulators have been most successful challenging deals with significant horizontal overlap, where a merger increases a company’s market share in its existing industry.
Concerns that health insurer consolidation would reduce consumer plan choice in select markets stopped a handful of proposed megamergers in the mid-2010s, including Aetna’s bid for Humana and Anthem’s bid for Cigna.
Both deals were blocked by the DOJ in 2017, setting a precedent that’s going to make regulators extremely skeptical of the Cigna-Humana deal, according to David Balto, an antitrust attorney and former policy director at the FTC.
“This is going to be an incredibly hard deal to get through. There is nothing that strengthens the resolve of an enforcement agency as having litigated a case and having won,” Balto said.
Given the history, investors were wary when the WSJ reported on talks between Cigna and Humana, analysts said. Shares in Humana dropped almost 6% and shares in Cigna dropped more than 8% over Nov. 29, the day deal speculation broke.
Yet, there are few horizontal concerns when it comes to this proposed deal — especially if Cigna and Humana follow through on plans to shed overlapping assets.
Cigna is currently pursuing a sale of its MA business, according to Reuters reporting. Meanwhile, Humana announced in February it would be exiting its commercial group businesses over the following 18 to 24 months.
Those divestitures largely eliminate competitive overlap between Cigna and Humana’s managed care businesses, J.P. Morgan analyst Lisa Gill wrote in a note on the deal speculation.
However, regulators are currently less open to divestitures as a solution to anticompetitive concerns than in the past, according to Balto.
“They don’t believe those remedies work,” Balto said.
Even if the divestitures are greenlit and eliminate the brunt of horizontal concerns, the FTC could still analyze how a Cigna-Humana merger could impact plan choice in select markets, according to Gunster’s Prokop.
"I don’t know how much more consolidation we can see and still see a fair market."
Samantha Prokop
Gunster head of healthcare transactions
In addition, regulators could look at the vertical effects of the transaction, like whether it would result in downstream harm to healthcare providers by giving the combined insurer more leverage in price negotiations. They could also consider how the merger would affect providers in markets where Cigna and Humana operate their own physician networks, and if it could result in more patients being steered away from independent providers.
Regulators might scrutinize senior care more heavily, given Humana owns a major senior-focused primary care network with hundreds of centers across 12 states, Prokop said.
“It’s one less contract for the doctors,” said Prokop. “It’s concerning you have four major payers and now you’re going down to three. I don’t know how much more consolidation we can see and still see a fair market.”
Federal antitrust agencies proposed updates to merger guidelines earlier this year that could make it easier for them to successfully argue more esoteric theories of harm, like a deal’s detrimental vertical effects, in court. If finalized, the guidelines are expected to give regulators more leverage to block mergers.
A new PBM colossus
If regulators do decide to challenge a Cigna-Humana deal, perhaps the most successful strategy would be to focus on overlap between the companies’ pharmacy benefit management businesses, experts say.
That’s because a union between the two would create a PBM titan in a market that’s already highly consolidated.
PBMs are the much-maligned middlemen in the drug supply chain between health insurers and pharmaceutical manufacturers. Cigna owns the second-largest PBM in the U.S., while Humana owns the fourth largest, according to pharmaceutical industry research firm Drug Channels Institute.
“The PBM overlap could be more problematic, depending on how the DOJ determines competition,” Bank of America analyst Kevin Fischbeck wrote in a note on the deal.
Combining Cigna and Humana’s PBMs would create a company large enough to rival market leader CVS Caremark, which could create vertical harm for drug companies or distributors, analysts said.
A Cigna-Humana PBM would hold 32% market share
“Given the extraordinary regulatory scrutiny of PBMs ... this aspect of the deal seems certain to be challenged,” TD Cowen analyst Gary Taylor wrote in a note on the merger speculation. PBMs already face a notable amount of anticompetitive scrutiny, including an investigation from the FTC.
Humana’s PBM is relatively small and primarily serves its own managed care members, noted JP Morgan analyst Lisa Gill.
Yet “we see a high likelihood regulators could challenge the deal anyway,” Gill wrote in a note on the deal.
FTC’s ‘deaf ears’
Experts estimate a Cigna-Humana merger could take from one to two years to close from when it’s announced, depending on what angle antitrust agencies take in reviewing the deal.
If regulators are just worried about horizontal consolidation in the managed care sector, and Cigna sells its MA business, the deal could be finalized in a matter of months, Prokop said.
Yet, “I think it is highly likely that the FTC either probes or challenges some aspect of the merger. [FTC Chair] Lina Khan has demonstrated a more hawkish attitude towards corporate consolidation, particularly in healthcare,” said George Congdon, senior analyst at research firm Third Bridge.
President Joe Biden has called on antitrust regulators to vigorously enforce antitrust laws in the healthcare sector, as prices continue to rise for Americans. However, regulators have a spotty record of challenging recent deals.
Insurers have been allowed to balloon in size to some of the biggest companies in the country, despite a tremendous amount of regulatory scrutiny, experts said.
In 2018, CVS bought health insurer Aetna for $78 billion, while Cigna bought its PBM Express Scripts for $67 billion. Health insurer Centene purchased WellCare for $17 billion in 2020. All three megamergers closed without a challenge, though Centene was required to divest select businesses.
Payers have also continued snapping up physician practices, including CVS’ buy of Oak Street Health this year for almost $11 billion, or UnitedHealth’s series of deals that’s helped grow its doctor network to 90,000 owned or affiliated physicians. That’s one-tenth of all doctors in the nation.
UnitedHealth also muscled through a $13 billion acquisition of data analytics company Change Healthcare last year, despite the DOJ suing to stop the deal.
Regulators have a low batting average in challenging deals without direct competitive overlap, experts said. A merger between Cigna and Humana could be more of the same: careful antitrust scrutiny, perhaps a direct challenge, but eventually the payers combine.
But “the agencies have really changed — they take a broader view,” Balto said. “The typical arguments of health insurers that we need the merger to strengthen our power to reduce provider costs — that’s going to fall on deaf ears.”
