Analysts say a Cigna-Humana merger is likely to face major antitrust opposition. But here's how the payers could eke out a win

The news that Cigna and Humana were weighing a potential merger sent shockwaves through the industry earlier this week, and analysts said the deal is likely to face major pushback from regulators—though there are avenues that could be used to push the deal through.

Daniel Jones, who pens the investment newsletter Crude Value Insights, wrote in an analysis that because Cigna and Humana have fairly different focuses despite both being large health plans, there is potential that the merger could be viewed as more of a vertical deal than a horizontal one, which is less likely to stymie competition.

Cigna is a far smaller player in the Medicare Advantage space while Humana's insurance business is overwhelmingly centered in MA. Humana, meanwhile, has limited reach in the commercial market, where Cigna has a far greater footprint.

Cigna was reportedly weighing a sale of its Medicare business, which could be a concession made to move the deal forward, Jones wrote.

He compared the deal to several prior planned mega-mergers, one of which found success: CVS Health's acquisition of Aetna. Both Cigna and Humana previously intended to combine with rivals in the space—Elevance Health, then Anthem, and Aetna, respectively—before those deals were blocked in the courts. Because the CVS-Aetna deal was more vertical, it was able to pass a court review when the other major payer mergers could not.

Analysts at BTIG wrote a note that the companies also look significantly different than they did in 2015 when they reportedly held similar discussions, which could make it easier for them to argue that the deal would not be anti-competitive.

That said, Jones wrote that he doesn't see a major likelihood of a deal closing successfully.

"It may be the vertical nature of this potential transaction that could create some potential for regulators to approve or to lose throughout the court process," he wrote. "Personally, I would not put a high probability of success on such a transaction."

Investors were also not entirely surprised that Cigna could consider absorbing Humana, as the Medicare Advantage insurer has long been viewed as an acquisition target. When reports first emerged the Cigna was considering the sale of its MA business, analysts at Stephens predicted that it may look next to a Humana acquisition.

The Stephens analysts echoed Jones in saying that while a legal challenge from the Department of Justice was likely inevitable if a deal were announced, the merger has a chance of surviving that test.

"As we always like to say, there's never a dull moment in MCO-Land," Analyst Scott Fidel and Associate Raj Kumar wrote in an analyst note.

Shares in both Cigna and Humana traded down following the news, with Cigna's stock price decreasing by 8% and Humana's by 5.5%. The analysts said the trepidation was likely due to the potential for a lengthy, drawn-out legal battle as well as the risk of one party (likely Cigna) overpaying to ensure a deal goes through.

Analysts at JP Morgan estimate that a deal could take between 12 months and 24 months to close, especially as even if there is a clear argument the payers could make, the antitrust enforcement environment right now is one where regulators are really looking to challenge major deals.

This is particularly true as the merger would cross over into the Federal Trade Commission's probe og the pharmacy benefit management (PBM) market, as Cigna owns Express Scripts, one of three PBMs that dominate the market. A combination with Humana would bring its pharmacy assets into the fold as well, making for an even larger firm in this space.

Hugh Lytle, CEO of Equality Health, told Fierce Healthcare he takes a more positive view of the deal. He agreed with the Wall Street analysts that given the complementary nature of the insurers' businesses, they could likely weather a legal challenge.

Lytle has built multiple health businesses and cut his teeth in the insurance industry. He said that the deal could have a significant positive impact on value-based care by uniting a wide array of assets under one roof to enable that shift. Also, that level of integration would position a combined Cigna-Humana as a rival to arguably the most valuable asset in healthcare: Optum.

UnitedHealth Group's Optum unit is a growth juggernaut and has been a major factor in the company's expansion into an industry behemoth. Having competition for Optum's various segments—pharmacy benefit management, clinical care, data analytics, provider enablement, virtual care and more—can only be a good thing, he said.

"I think if you look at it reasonably, it's just actually creating a new and more competitive market for Optum," he said, "and servicing all these other payers as they come up the value-based care front."

Cigna's Evernorth, which includes Express Scripts, offers access to multiple services that make value-based care tick, Lytle said. Humana, meanwhile, has plenty of experience with these models given its focus on Medicare Advantage, a sector where value-based care is far more advanced.

That expertise could come into play when pushing for greater adoption of value-based models in the commercial space, he said.

Given these potential synergies, the deal is unlikely a bid from either payer to simply add more insured lives to its rolls, Lytle said.

"I don't get the sense that gaining new insureds is 100% what they're after here, as it is transforming how care is delivered to those members in a more meaningful way," he said.