How Cigna Deal Limits Anthem’s Blue Cross Brand

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When health plans operate using the Blue Cross and Blue Shield brand, they are generally limited to business in a specific state or region as part of a licensing agreement with their trade group, the Blue Cross and Blue Shield Association.

So when Anthem (ANTM), a major operator of Blue Cross plans, made its $184-a-share offer for Cigna (CI) to grow both health insurance businesses, it created potential hurdles when it comes to Anthem’s valuable Blue Cross brands expanding even with the addition of Cigna’s geographic reach and 14.6 million health plan members.

And that’s making Cigna CEO David Cordani and his board nervous and a key reason why Anthem’s generous offer was rejected this past weekend.

Because of the association’s rules that prevent Anthem from using its well-recognized Blue Cross and Blue Shield brand in regions where Anthem doesn’t have the Blue Cross license or own a Blues plan, Anthem is forced to sell health insurance under a different brand like Amerigroup that marketing experts and even Anthem insiders say isn’t as strong as the Blue Cross brand.

In Texas, for example, the Blue Cross and Blue Shield licensee is Health Care Service Corp.’s Blue Cross and Blue Shield of Texas company. Health Care Service Corp, a mutual insurer owned by policyholders, also operates Blue Cross and Blue Shield plans in Illinois, New Mexico, Oklahoma and Montana. Even though Anthem markets under the Blue Cross brand in 14 states, it cannot do so in many other states.

In a letter to Anthem’s board, Cigna chief executive officer David Cordani and Cigna board chairman IsaiahHarris said, among other things that Anthem lacked a “growth strategy” and faced complications due to rules of the Blue Cross and Blue Shield Association.

“We have serious questions about how the combined company would comply with the intricate rules and constraints administered by the (Blue Cross and Blue Shield Association),” Cordani and Harris wrote in a letter to Anthem’s board. “To date, we have not received any of the previously requested non-public agreements and rules governing the (association) and, accordingly, have been unable to resolve the risks associated with Anthem’s membership in the BCBSA.”

In addition, the Blue Cross and Blue Shield Association (BCBSA) requires health plans like Anthem that use its licenses to operate a large amount of its business under the Blue Cross brand. Reached for comment, the association wouldn’t say how much.

“You have previously advised us that the revenue restrictions imposed by the rules of the BCBSA create meaningful and complicated constraints on the growth of its members, including Anthem,” Cordani and Harris said of the association’s rules in their letter, which is dated Sunday, June 21. “We have not been able to validate that a combination of Cigna and Anthem could be integrated successfully under the BCBSA rules, and the stakes are too high and the penalties too great to move forward without that validation. Indeed, you terminated certain prior discussions due to this very issue, and you have yet to adequately address our well-founded concerns.”

But Anthem chief executive officer Joe Swedish told analysts and investors on a conference call Monday that he was confident any issues with the Blue Cross and Blue Shield Association could be worked out. Under association rules, Anthem  would have two years after the close of a merger with Cigna to work out licensing issues. And since any Anthem-Cigna deal wouldn’t close until the end of 2016, Swedish indicated ample time to iron out any issues in what could be a three-year process.

“Our relationship with the association has never been stronger,” Swedish told analysts.

Anthem, which said its talks with Cigna date back to last August, say Cigna’s recent concerns about the Blue Cross association’s rules came as a surprise.

“Over the course of our discussions with Cigna beginning last August, we have comprehensively reviewed the Blue Cross Blue Shield Association rules and the many paths that are afforded to us to comply with the rules,” a Blue Cross spokeswoman said in a statement to Forbes. “The last offer we received from Cigna was focused on economics, requesting more ownership interest in the long-term aspects of this Company, and not Blue rule compliance.”

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Source: Forbes