Anthem to buy Cigna for $54B in mega insurance merger

The health care insurance industry's consolidation rush is accelerating with insurance giant Anthem's (ANTM) deal to acquire Cigna (CI) in a transaction valued at $54.2 billion.

Anthem on Friday confirmed that it has reached a deal to buy Cigna, creating a mammoth for-profit insurer with annual revenues of more than $115 billion and more than 53 million insured patients.

Together, the insurers represent about 17% of the U.S. population.

Their tieup follows weeks of intense negotiations, with Cigna at one point publicly rejecting Anthem's entree.

But Anthem CEO Joe Swedish and Cigna CEO David Cordani said on a conference call that they had ironed out their differences. Anthem's offer got a little sweeter, and the executives negotiated a explicit power-sharing agreement.

Swedish will retain his titles of chairman and CEO of Anthem, while Cordani will become president and chief operating officer.

"This transaction better positions us to serve the evolving health care market with increased participation by individual consumers and growth in the government business and the need for solutions that advance affordability, choice and quality," Swedish said.

Still, significant concern remains regarding the executives' ability to pull off the merger successfully -- and whether the deal is good for consumers.

"It could make health care more affordable because it gives them more leverage to negotiate with providers of care, which enables them to drive a tougher bargain and that should be translated back into better premiums for consumers," said Marianne Udow-Phillips, director of the Center for Healthcare Research and Transformation at the University of Michigan, in an interview.

"But it could also give them more monopoly power in some markets and that might actually mean that it wouldn’t lower premiums for some consumers."

Anthem has 52,000 employees, $78.5 billion in annual revenue and 38.5 million members, while Cigna has 37,000 employees, $36.5 billion in revenue and 14.5 million members. Anthem already runs Blue Cross and Blue Shield insurance plans in 14 states and Medicaid offerings through the Amerigroup brand in 19 states.

Swedish says the companies are approaching the deal with "eyes wide open on the challenges" of combining their enormously complex businesses. He said the combined company would shed $2 billion in costs within two years of the deal's closing, though he didn't specify where those cuts would occur.

"We’re fully committed to the integration challenges being overcome," he said.

The deal comes as the insurance industry is grappling with rapid changes in the business, including the ripple effects of federal health care reform. UnitedHealth Group CEO Stephen Hemsley last week called the merger-and-acquisition realm in the insurance business "exceptionally active."

Aetna recently reached a deal to acquire smaller rival Humana for $37 billion, while UnitedHealth Group was rumored to be considering a deal for Aetna.

Insurers are under pressure to plunge more of their premium payments into care, as required by the Affordable Care Act, which overhauled the industry and requires individuals to have insurance. That gives insurers an incentive to get bigger and more diverse because they can spread out administrative costs among a larger base of patients.

"That really does pinch the ability to eek out profit," said Paula Wade, a health care analyst with Decision Resources Inc. "So that really is what’s driving these kind of mega-scale mergers"

Analysts say the deal makes sense for Cigna because it's focused primarily on company-funded health plans. But most of the insurance industry's growth is coming from plans offered to individuals through government exchanges and in states that have accepted the U.S. government's offer to help expand Medicaid.

"Insurers who have focused just on the employer market are not where the growth is, so that’s why you see this gravitation" toward combinations that can take advantage of Medicaid and exchanges, Udow-Phillips said.

Anthem is delivering a combination of cash and stock for Cigna, equaling compensation of about $188 per Cigna share based on the May 28 closing price of Anthem stock. The two insurers have been maneuvering at the bargaining table for weeks. Cigna initially rejected Anthem's $184-per-share offer as too low.

About 55% of the transaction will be paid in cash, and 45% in Anthem stock. Following the deal's conclusion, Anthem's original shareholders will control about 67% of the company, while Cigna will hold about 33%.

Five members of the Cigna board, including Cordani, will join the nine Anthem board members, creating a 14-person group to oversee the company.

The deal will require regulatory approvals. Executives said they're confident they can obtain authorization to close the deal by the second half of 2016.

"In short both of our businesses will be stronger together," Cordani said on the conference call, though he added "it’s pretty darn complex."

Wade, the health care analyst for Decision Resources, predicted that state regulators will force the bigger Anthem to shed customers in certain regions where it will have a significant market share.

In the Richmond, Va. area, for example, 52% of residents will be insured by the bigger company. In the Indianapolis, Ind., area, it will be 46%.

"For a market of that size, that’s a lot of concentration," Wade said. "That’s going to get some attention from the state regulatory level."

Follow USA TODAY reporter Nathan Bomey on Twitter @NathanBomey.