Cigna-Humana deal would face intense anti-trust scrutiny

A potential merger between health insurers Cigna and Humana would create a powerhouse to rival UnitedHealth and CVS — but the deal is far from guaranteed from an antitrust perspective.

Why it matters: Both parties have pursued selective divestitures in their respective insurance presences, but Cigna's stronghold in pharmacy benefit could raise regulators' hackles, industry watchers tell Axios.

Catch up fast: The insurers are discussing a stock-and-cash deal that could be finalized by the end of the year, presuming talks don't dissolve, WSJ reported yesterday.

• The combination would be huge: Cigna's market value at the time of writing stands at $77 billion, while Humana's is roughly $59 billion.
• Cigna reported about $181 billion in revenue last year, while Humana booked about $93 billion in 2022.

Between the lines: Cigna earlier this month was reportedly selling its Medicare Advantage unit, per Reuters — a move one health care banker tells Axios was likely a prelude to jumping on Humana.

• Meanwhile, Humana has a strong position in MA and has been exiting commercial markets over the last year.
• "It gets trickier on the PBM side of things where we are unsure of how a deal could be structured to satisfy regulators," Julie Utterback, a senior equity analyst for Morningstar, wrote in an email to Axios' Tina Reed.
• "It would leave us with three PBMs controlling the market with most of the market share," co-leader of Goodwin's health care practice, John Jones, tells Aaron.
• "A big focus will be what impact it will have on costs," he adds. "These PBMs also administer the Medicare Part D benefit for Medicare so impact to the government and the elderly will also likely be evaluated."

Meanwhile, Humana's growing primary care business in CenterWell would give Cigna meaningful physician ownership, in a health care paradigm that's seen insurers snap up doctors' offices.

• "The ability to house Humana's assets into a structure with Cigna's PBM — to me that's a really smart move and will help drive performance in VBC," says Equality Health CEO Hugh Lytle.
• "At the end of the day, they're in a better position to deliver an Optum-like solution," he says.

Flashback: We've (sort of) seen this movie before. Both insurers attempted mega-mergers nearly a decade ago, with Cigna trying to merge with Elevance in an estimated $54 billion combination, and Humana attempting a $37 billion merger with Aetna, but regulators blocked both.

• After both proposed mergers were struck down in 2017, Wall Street analysts speculated a Cigna-Humana tie-up could be the next move.

What they're saying: "It feels like deja vu," BTIG managing director and health care analyst David Larsen wrote in a research note circulated Thursday.

• "After the mega health plan deals [of 2015] were blocked by regulators and the judicial system," Larsen adds, "we are somewhat surprised to see these announcements."

Yes, but: There are some differences between the two scenarios this time around. Compared with 2015, for example...

• "The line between payers and providers has become more blurred over the past decade," says Larsen.
• Cigna could argue that its high proportion of commercial members differentiates it enough from Humana's mostly Medicare and military customers.
• "Those last deals [in 2015-17] were really about competitiveness and avoiding a marketplace that could create price inflation," Lytle says.
• "Those things I think will be the underlying carriage here, too, even if Humana sells off their nascent commercial business and if Cigna sells off their MA business," he adds.

Reality check: "It's not often in a proposed merger that you see both trade down," says one venture health care investor.

• Shares of Cigna closed 8% lower Wednesday, while Humana's stock closed more than 5% lower.
• "It's investors reacting to what could be a pretty protracted process that's likely to end up in a deal that gets blocked," the investor says.

What's next: In an industry predictions note for Forbes (before the WSJ story), Scan Health Plan CEO Sachin Jain said he expects to see other big health plans like Elevance and Molina make M&A moves.

• "And don't forget about smaller regional plans, who will continue to shore up their competitive positioning in the increasingly consolidated landscape of national giants," he wrote.

Our thought bubble: Whether or not the merger clears, the move changes the chessboard and demonstrates market appetite for consolidation.

Humana declined to comment. Cigna did not return Axios' request for comment.