Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Two major insurance mergers -- Anthem-Cigna and Aetna-Humana -- are set to reshape the whole sector. One seems to be sailing relatively smoothly toward completion. The other looks to be lurching toward "who knows?"

Investors have never been sold on either deal as a sure thing, but the Anthem-Cigna tie-up is looking increasingly endangered. Anthem's offer is now 36 percent above Cigna's price, the biggest such gap since the deal was announced. Aetna's offer is 28 percent above Humana's price -- also hardly a vote of confidence. But though Anthem CEO Joe Swedish said at a conference Tuesday that the deal is progressing well, there is more reason to doubt the company's tie-up with Cigna.

As if the high regulatory hurdles to such mergers weren't enough, lawyers at Anthem and Cigna are reportedly sending each other delightfully passive-aggressive letters over a series of deal-related disputes, according to the Wall Street Journal

The Great Divergence
Investors see Anthem and Cigna's chances of completing an insurer mega-merger as lower than Aetna and Humana's. Deal value premium to target stock price.
Source: Bloomberg

The lawyers' letters reveal a long slate of difficulties. Cigna seems nervous about Anthem's legal fight with pharmacy benefit manager Express Scripts over drug pricing. Anthem is reportedly accusing Cigna of holding back information and being slow to approve documents related to the deal. The letters suggest Anthem and Cigna aren't nearly as far along in the regulatory review process as Aetna and Humana. And there have apparently been disputes over the role Cigna CEO David Cordani would have at the combined company. He's currently slated to take over as COO. Should the deal fall apart, Cigna would walk away with a meaty $1.82 billion termination fee and Cordani would keep the top job. 

This does not paint a picture of two companies on the same page, and their issues could delay antitrust approval. This may be a series of resolvable hiccups. Or it may represent foot-dragging from companies with deal remorse.

The implied levels of doubt here are comparable to some pretty shaky mergers. Cigna is trading at a similar discount to its deal price as Alere is to Abbott's. That deal is on the rocks after Abbott said it had "serious concerns" about the accuracy of Alere's financial information and tried to pull out. Not exactly good M&A company for Anthem-Cigna. 

No Big Deal

The risk of regulatory rejection over antitrust concerns is very real for both insurance deals. But it may be a bit more real for Anthem and Cigna. Those companies have more business overlap on the commercial side of their business than do Aetna and Humana. And divestitures may not be a fix, given the size of the units, according to Bloomberg Intelligence.

Anthem is already the biggest commercial insurer; acquiring Cigna would make it the biggest by a large margin. In contrast, Aetna's deal would make it the new leader in Medicare Advantage enrollment, but only just barely, and its relative position in other markets would stay exactly the same. Regulators have started to think more about how mergers affect the entire U.S. market, a shift from a previous focus on how deals affect local competition. That is not good news for Anthem's merger prospects.

Here's where enrollment in different sectors stood as last year; none of the big five firms had a dominant lead in any single area. 

Before
No one insurer truly dominates any of the three major areas of health insurance in the U.S.
Source: Bloomberg Intelligence
Note: 2015 figures

And here's what enrollment at the combined companies might look like based on 2015 figures. If the proportions stay relatively constant, then Anthem-Cigna could have a more than 10 million-person lead on the commercial side.  

After
Anthem and Cigna's combined commercial enrollment would top the nearest competitor by more than 10 million. Aetna-Humana's lead in Medicare Advantage would be about 1 million
Source: Bloomberg Intelligence
Note: 2015 figures

Speed matters in this case. If one deal gets completed first, then regulators might be more inclined to reject the other, in order to keep the market more broadly competitive. That's especially true if the second deal is Anthem-Cigna, the larger of the two mergers. 

It's not certain that there can be only one giant insurance merger. But investors seem to think Aetna-Humana is more likely to survive. The stock-price gap between the two companies isn't too wide just yet. But hedge funds are growing more bullish on Aetna-Humana than on Anthem-Cigna: Funds now own 20.2 percent of Humana shares and 11.4 percent of Cigna's, according to Bloomberg Intelligence. 

The safer bet is probably the right one. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net