Cigna Will Hunt For New Deal Now That Anthem Merger Is Blocked

News that a U.S. District Court Judge has blocked the $48 billion purchase by Anthem of Cigna to create the nation’s largest health insurer means Cigna could be on the hunt for a smaller deal that could pass regulatory muster.

Cigna CEO David Cordani has laid the groundwork for the insurer to chart a future as a larger independent company ready to do another deal. The judge’s ruling Wednesday blocking the deal as anticompetitive means Anthem is expected to pay Cigna a $1.85 billion breakup fee. Anthem Thursday morning said it plans to appeal the judge's ruling while Cigna said it was reviewing its options.

With the breakup fee, existing cash and other financial leverage, Cigna will have up to $14 billion in capital it could deploy this year.

“Our outlook for an attractive 2017 is further strengthened by our current capital position,” Cordani told analysts on last week’s fourth-quarter earnings call. “In total, depending on the mix of share repurchase, dividends and M&A, we would expect to have between $7 billion to $14 billion of deployable capital in 2017. It's important to emphasize here that we have a disciplined approach and a strong track record of deploying capital and avoid having surplus capital sit idle for any length of time.”

Cigna could look for a way to improve its Medicare business, which has been dogged by regulatory issues and ended 2016 with 504,000 members compared to 502,000 in 2015. Cigna was banned during last fall’s open enrollment period from marketing Medicare Advantage plans to seniors after the Centers for Medicare & Medicaid Services hit the insurer with sanctions. “We made progress with our remediation efforts and are in the latter stages of the audit response work relative to the Medicare Advantage offerings,” Cordani said last week.

Thus, Cigna might now instead feel like it needs to catch up by growing via acquisition. One plan that emerges as a likely target is WellCare Health Plans , which operates Medicaid plans for poor Americans as well as Medicare Advantage and Medicare prescription drug plans for seniors.

WellCare had 345,000 seniors in its Medicare health plans at the end of 2016. WellCare's Medicare market doesn't overlap with Cigna, analysts say. Thus, that could help avoid the issues dogging Aetna ’s acquisition of Humana that was also blocked by a federal judge worried about the lack of competition in Medicare Advantage. Combined, Aetna and Humana have more than 4 million seniors in Medicare Advantage plans.

It’s clear Cigna sees promise in Medicare Advantage, which could also gain momentum if the Republican-led Congress can convince President Donald Trump that Medicare needs to be further privatized.

“Seniors who are looking at alternatives view Medicare Advantage quite favorably,” Cordani told analysts last week. “Medicare Advantage on average serves seniors with lower average income than fee-for-service, so they're high-value buyers. Medicare Advantage as an industry generates superior clinical outcomes through care coordination, and very importantly, the more innovative healthcare professionals appreciate the Medicare Advantage program as an opportunity to better coordinate care.”