Will 'big 5' health insurers become 'big 3' under Obamacare?

America's biggest health insurers are about to get even bigger, driven into a wave of consolidation by Obamacare's new regulations and markets.

Anthem's disclosure Saturday that it's offered about $47 billion for Cigna Corp. is the first public confirmation the deal-making is in full swing. Cigna rejected the offer on Sunday, despite Anthem's attempt to pressure Cigna's board by taking the offer public. Anthem, Aetna Inc. and UnitedHealth Group Inc. all are poised to emerge as buyers or sellers when the dust settles.

Driving the consolidation is the 2010 health law that put tougher rules on the industry, demanding more covered services, better care and a ceiling on profits. It funded coverage for the uninsured, and companies are racing to capture the more than 20 million customers who will buy coverage through Obamacare's markets.

"The industry is far more regulated under Obamacare and so companies need to do a better job at negotiating better unit costs and contracts," said Ana Gupte, an analyst with Leerink Partners. "Market share helps. The larger you are, the stronger standing you have."

Gupta predicts that the "big five" insurers will merge into a "big three," likely composed of Aetna, Anthem and UnitedHealth.

A combined Anthem and Cigna would form an insurance giant with more than 50 million customers, adding power to negotiate prices with hospitals and doctors. Cigna also has a large presence overseas, another source of potential growth.

Cigna said in a statement Sunday that Anthem lacked a clear strategy for growth or for how to run a merged company. Cigna called Anthem's offer inadequate and said it had fundamental concerns about a deal.

Not alone

Anthem isn't alone in seeking a major deal. While the Indianapolis, Indiana-based insurer has also expressed interest in Humana Inc., so have Aetna and Cigna, Bloomberg has reported. The Wall Street Journal has said UnitedHealth might be interested in Aetna or Cigna, and that Aetna has proposed buying Humana.

As Anthem and Cigna go back and forth, a deal isn't guaranteed. Anthem has made multiple approaches since last year and been rejected. Going public raises the stakes.

"Anthem is upping the ante," said Chris Koller, a former Rhode Island health insurance regulator. "They have been trying to do this by cooperating but now they are forcing the deal by going public and putting up an offer that is hard for the board to refuse."

One major sticking point ha been who will head a combined company, according to Anthem.

In a June 20 letter to Cigna's board of directors, Anthem Chief Executive Officer Joseph Swedish said that he should run the combined group for two years after the deal closes, and that Cigna CEO David Cordani should be president and chief operating officer as part of a deal that would include Anthem conceding on other board-related issues.

"We were stunned that the Cigna Board continues to insist on a guaranteed CEO position for Mr. Cordani over choosing to allow its stockholders to realize the significant premium being offered," Swedish said in the letter.

Cigna, in its statement rejecting the offer, said Anthem's proposal would give Swedish too many roles.

Regional businesses

While the big five are indeed large, their businesses are for the most part regional. Not every company has operations in every state, and buying a competitor offers access to new markets.

Anthem, for example, has about 38.5 million members, through insurance plans in 14 states and government plans for the poor in 19 states. A combination with Cigna would give it 53 million customers and add services in Arizona, Oklahoma and elsewhere.

While regulators will scrutinize a deal, a combination can probably pass antitrust hurdles, said Jason McGorman, an analyst with Bloomberg Intelligence. "Of all of the deals announced, this one has fewer hurdles based on our analysis."

Gupte agreed. "In combination Anthem and Cigna don't have market share that's threatening. There could be some minor divestitures, but that's it. It's a doable transaction."

Scrutiny

A merger between UnitedHealth - the biggest insurer by market value - and Aetna would face much more scrutiny from regulators, Gupte said.

Health insurers' consolidation is driven in part by hospitals doing the same sort of deals, said McGorman said in a telephone interview. "Insurers need to gain efficiencies and scale to get more negotiating power with the hospitals."

That could, in turn, cause more hospital mergers, Gupte said. "After this deal, hospitals will start looking at their negotiating power. The industry is too fragmented."