While analysts and professors don’t believe that reported conflict between Anthem and Cigna executives damages the chances of a merger approval, some wonder how the two companies could integrate into a well-functioning insurance giant if the U.S. Department of Justice approves their proposed merger.
Anthem CEO Joseph Swedish, who spoke at an investors conference this week, said the conflict detailed in a Wall Street Journal article had been resolved and the merger discussions were now going well.
“You would expect dynamic tension in terms of ultimately deciding what is best-of-breed what parts do you keep, what don’t you keep, who leads what,” Swedish said, according to several outlets that covered the conference.
Cigna declined to comment on his remarks.
Jason McGorman, a senior health care analyst at Bloomberg Intelligence, said the Wall Street Journal story was an echo of the public letters that Anthem and Cigna executives wrote in June 2015 when Cigna was resisting Anthem’s overtures.
“They were concerned that Anthem’s management team weren’t appreciating how difficult the integration would be,” he said, referring to Cigna’s reasons for rejecting a first bid.
Before that letter, Anthem complained that Cigna CEO David Cordani was resisting sale because he wanted to lead the combined company.
Swedish said in the letter to the board that he would assume the CEO spot of the combined company, and would stay there for two years. But after he stepped down, Cordani was not promised the job.
According to the Wall Street Journal, Anthem at first intended to limit the scope of Cordani’s chief operating officer role, but after Cordani pushed back, Anthem agreed to give him wider responsibilities.
“It’s been a power struggle from the beginning, I don’t know ultimately how they’re going to resolve that,” McGorman said.
“To me, it spells trouble on the integration front,” he said. “From an investor’s perspective if it does get done, Anthem has set a pretty lofty target of $2 billion in synergies by the second year.”
Some of that would be cutting jobs, some of it would be being able to abandon leases, or use more efficient systems from one company or the other.
And, McGorman said, Anthem likely expects to have more market power in its negotiations with health care providers, and therefore, would be able to get them to agree to lower reimbursement rates.
McGorman said Cordani has a great track record at Cigna, and that could strengthen his hand to become the CEO after Swedish.
Dissension
Even before the Wall Street Journal published excerpts of letters between the two companies’ lawyers, there were hints of dissension around the merger.
Jennifer Rie, a senior litigation analyst for antitrust with Bloomberg Intelligence, said she found it odd that Cigna publicly warned it no longer was sure the deal could be closed by the end of 2016, and Anthem publicly disagreed.
“I don’t know why Cigna said what they said. For Anthem to come out and contradict Cigna, it looked even stranger,” she said, referring to Cigna’s announcement in May that the merger might not be completed this year.
“There’s no doubt Cigna saying something like that would scare investors,” she said, and in fact the spread between Anthem’s offer price and Cigna’s stock did widen after the statement.
In the letters, the two sides accused each other of not responding promptly to requests for information needed to respond to regulators.
Rie said she didn’t understand the panic she saw in the letters between lawyers from Anthem and Cigna that were leaked to the Wall Street Journal and published earlier this week.
“It doesn’t really matter if Aetna-Humana is out ahead,” she said, because the Justice Department has already said they will consider each while considering the impact of the other merger. Aetna’s plan to acquire Louisville-based Humana is also currently before the Justice Department.
The only way it would matter, she said, is if the Department of Justice orders divestitures in certain markets to approve both deals, and the merged Aetna has already attracted the logical buyers for the divestiture that the merged Anthem needs.
However, Anthem and Cigna have said they have very little overlap. Where both are strong is in providing services to the largest employers who self-insure. The problem there, Rie said, is that it’s hard “to say how that could be solved with divestitures.”
Rie said there’s not a hard deadline for when federal regulators will decide, because even though there’s a timeline for how long they have to consider once all the information is in, it’s in the company’s interest to allow them more time, as long as lawyers are “still having productive discussions they think could lead to a clearance.”
Yale School of Management Professor Fiona Scott Morton, who used to work in antitrust at the Department of Justice, said, “If you’re considering together, that raises the hurdle for approval, because the market is inherently more concentrated.”
And, she noted, the health insurance market is more politically sensitive than your typical market.
“For the Affordable Care Act to function requires competitive health care markets from insurers; if the regulatory authorities are going to allow health insurance mergers then we might have to think about whether we’re able to keep down costs through the mechanism of competition alone,” she said.
If They Don’t Merge?
What happens if the Anthem-Cigna merger isn’t consummated, or for that matter, if the Aetna-Humana merger is rejected by the Department of Justice?
“Then the question is, what do these companies want to do with their business long term?” McGorman asked rhetorically: Do they need to buy any other companies to achieve their goals?
“Maybe they just hold pat,” he said, but maybe one of the insurers would decide to buy a pharmacy benefit manager.
“That’s the speculation we’ve looked at; would Aetna buy Express Scripts? Would Anthem?”
Anthem is in litigation with Express Scripts, saying the company overcharged for drugs.
Cigna is smaller than Aetna and Anthem, and therefore couldn’t make as large an acquisition, but it would have nearly $1.9 billion in a breakup fee from Anthem to go shopping with, or to use to do share buybacks.
“They have a much more diverse portfolio than the rest of their competitors,” McGorman said. “What they’d want to buy is really anyone’s guess.”
Date: May 31, 2016