HUM Humana Inc

By Anna Wilde Mathews 

If the Justice Department wins its two health-insurance antitrust cases, the four companies involved would face business challenges as they move forward alone.

All four -- Aetna Inc., Humana Inc., Anthem Inc. and Cigna Corp. -- would be left without the additional scale that they said would help them pare costs and boost their products. They would remain substantially smaller than the industry's largest player by revenue, UnitedHealth Group Inc., and could turn to other smaller deals to gain at least some heft in key markets.

The cases are likely to take months to resolve, leaving the companies with continued uncertainty in the medium term.

Aetna and Humana said they would battle the Justice Department suit, as did Anthem. Cigna issued a statement that was less clear-cut, leading analysts to speculate that, in light of earlier tension between the two partners, Anthem and Cigna might ultimately choose to abandon their agreement. Anthem and Cigna declined to comment beyond their statements.

Without Aetna, Humana will maintain a narrow focus on Medicare Advantage, which is a rapidly growing business but can be operationally difficult. On Thursday Humana flagged improvements in its Medicare business and announced a substantial upgrade to its 2016 earnings projection. Humana is already pulling back from its Affordable Care Act marketplace business, which has run up losses.

Humana would also come out of a busted deal with a substantial cash cushion -- $1 billion from Aetna. Chief Executive Bruce D. Broussard said Thursday that the company's "core business continues to do well," and money from a breakup fee would be used according to previous capital-allocation plans, which include possible spending on acquisitions, share buybacks and dividends.

Aetna Chief Executive Mark T. Bertolini would lose the chance to quickly forge a diversified insurance powerhouse with government business balanced against traditional commercial coverage, though Aetna had previously been working to build up its Medicare and Medicaid businesses.

Aetna would likely be less inclined to remain a major player in the challenging ACA exchange business if its combination with Humana fell through. As a solo company, with the costs associated with the busted deal, Aetna would have "less bandwidth to take risk," a person with knowledge of the matter said. Lacking Humana, Aetna would continue with its long-term strategy of investing in opportunities for organic growth, potential acquisitions and share buybacks, this person said.

If both deals are blocked, Anthem would remain the second-biggest insurer, with a large Medicaid business and powerful commercial franchise in its 14 main states. But Chief Executive Joseph R. Swedish would still face a continuing legal battle with pharmacy-benefit manager Express Scripts Holdings Inc., as well as difficulties with the ACA exchanges.

Anthem has told investors that if the Cigna combination collapsed, it would move to purchase its own shares, as well as consider other acquisitions in the Medicaid and Medicare categories.

According to the merger agreement, Anthem will have to pay Cigna $1.85 billion if the deal is blocked on regulatory grounds, but the fee won't be owed if Cigna makes a "willful breach of its obligations" to complete the deal, leaving the door open to litigation by Anthem against Cigna.

Cigna's CEO, David Cordani, will likely get tough questions from investors about the fate of the Anthem deal, if it does collapse. Cigna would remain the smallest of the big five national insurers, with about $38 billion in revenue last year.

Analysts have said that, armed with the Anthem breakup fee and a substantial existing cash stash, Cigna would likely move to bulk up with an acquisition, perhaps of a Medicaid-focused insurer, or Medicare assets.

In its Thursday statement, Cigna highlighted its strength as a stand-alone company, saying it has "remained strong by continuing to invest in innovative solutions...."

Write to Anna Wilde Mathews at anna.mathews@wsj.com

(END) Dow Jones Newswires

July 21, 2016 18:36 ET (22:36 GMT)

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