Cigna's disclosure signals trouble ahead for insurer mergers

Like a commuter who runs to catch the closing doors of a train only to wait an interminable time for it to depart, leaders at one of the major health insurers seeking permission from the Justice Department to merge are probably feeling unexpectedly frustrated. Why? A regulatory review process they banked on sailing through seems to have turned out to be more difficult than planned.

Such was the justification for a regulatory filing from Cigna that accompanied its recent first-quarter earnings report--a brief, easy-to-miss disclosure that came with potentially major implications. It basically warned investors that the merger with Anthem might not close at the second half of 2016, as both insurers had previously estimated.

"In light of the complexity of the regulatory process and the dynamic environment, it is possible that such approvals may not be obtained in 2016," the filing said. Anthem, however, maintained its prediction--a discord that harkens back to the two insurers' icy negotiations before they ultimately inked their deal last July.

Naturally, that filing was the first topic brought up during the question-and-answer portion of Cigna CFO Tom McCarthy's presentation at a Las Vegas conference last week.

"I think the disclosure speaks for itself. We're really focused on the depth and complexity of the regulatory process, and in fact, there could be timing implications from that," McCarthy said, adding "It's not related to any insights from the DOJ or state regulators on the merits of the case."

As the moderator pointed out, though, Cigna presumably knew from the outset that federal regulators were going to thoroughly vet the merger's merits. So why the sudden about-face?

McCarthy offered a measured explanation that the company "probably did underestimate" the breadth and depth of the Justice review.

However, here's what I think is really going on: For one, Cigna executives are probably looking with increasing nervousness at the feds' recent spate of antitrust victories, topped off by the unraveling of the Halliburton-Baker Hughes deal. And under the leadership of top official William J. Baer, the DOJ's antitrust division has been less willing to accept merging companies' proposed remedies at face value.

Plus, he has been publicly skeptical about the Anthem-Cigna and Aetna-Humana deals, saying they are "transformational mergers in a number of markets" that could highly consolidate the industry and therefore require careful scrutiny to ensure "we aren't making a mistake in which shareholders benefit and the consumers pay the cost."

Finally, though healthcare providers have expressed vehement opposition to the insurer mergers, federal regulators' treatment of hospital and physician group deals speaks to their increasing concern about the healthcare industry's consolidation arms race. The Federal Trade Commission recently challenged the proposed merger of Chicago-area providers in U.S. District Court--though it did recently lose a rare challenge to a health system merger in Pennsylvania, as PennLive reports.

It all adds up to a regulatory landscape that perhaps isn't quite what Cigna bargained for. If its merging partner Anthem--or Aetna or Humana--are also feeling the heat, they aren't saying so. And of course, they have reason to feel optimistic: After congressional hearings concerning the mergers several months ago, many experts saw lawmakers' less-than-tough line of questioning as a sign the review process would be smooth sailing for the insurers. Plus, both deals have made headway gaining state regulators' approval.

So maybe the proverbial train will get them to work on time, after all.

But Cigna's change of heart shouldn't be brushed aside, as that type of disclosure is a clear warning to investors that the process isn't going as planned. Maybe it's just an abundance of caution, or maybe it's a cautionary tale for healthcare companies of all types: Count on the feds to rubber-stamp mergers at your own risk.

- Leslie @HealthPayer