(Bloomberg) — Investors have for months been cool to the idea that Anthem and Cigna’s proposed $50 billion insurance merger will actually happen. Now things are looking downright frigid. 

Less than a week after California’s insurance commissioner went scorched-earth on the proposed merger and asked regulators to block it, the Wall Street Journal on Monday reported federal antitrust officials doubt Anthem and Cigna will be able to make enough concessions to make the deal viable.  

Not-so-secretly applauding are rivals Aetna and Humana, which are also trying to combine in a $37 billion deal. The more challenges Anthem and Cigna encounter, the better the odds for the smaller transaction. It’s a worst-case scenario for Anthem and Cigna. But it’s a possibility both firms need to acknowledge.

See also:  California insurance regulator tells U.S. to block Anthem-Cigna deal

The Aetna-Humana deal raises fewer regulatory red flags. A combined Anthem and Cigna would be a private sector juggernaut. Anthem was already the biggest private health insurer in the country by enrollment, at about 31 million at the end of 2015. Adding Cigna would bring it to nearly 45 million. That heft would work to the merged companies’ advantage in courting clients, but would make it harder for smaller rivals to compete. Aetna-Humana would be the biggest Medicare Advantage insurer. But because that’s a more localized market, with low barriers to entry, the combination wouldn’t shift the competitive landscape as much.

The Aetna-Humana deal got an extra shot of confidence on Monday, when California’s Department of Managed Health Care agreed to approve it. The state wasn’t critical for the companies, given Humana’s small presence there. But it’s one more indication Aetna is in a better position than Anthem to get its megamerger done.

Both proposed deals were announced almost concurrently last summer because none of these insurers wanted to be left without a major partner. Going it alone would mean operating at a competitive disadvantage to larger rivals, including the already giant UnitedHealth Group. The pressure on Anthem to Cigna to find a deal and build negotiating leverage in a rapidly consolidating health care industry will get all the more real if their merger is sidelined while Aetna-Humana goes through.

In this scenario, Anthem wouldn’t gain the dominant position in commercial insurance or the pricing power it hoped to add by buying Cigna. The company’s margins have been under pressure from its participation in the Patient Protection and Affordable Care Act’s insurance exchanges; adding scale with a big deal was meant to help pad those margins. Cigna, meanwhile, would remain a distant fourth in commercial enrollment and a relative minnow on the government-managed side, meaning it will also face pressure to build scale.

See also: WellPoint Rebuts Attacks On Anthem Deal

The problem is there just aren’t any perfect alternatives for a transformative acquisition, particularly from Anthem’s perspective. The next three biggest publicly traded U.S. health insurers after Cigna and Humana are Centene, WellCare and Molina. A deal with any of those would be an easier sell to regulators than the Cigna combination. But only the first can deliver the kind of sales impact a Cigna deal can. Centene is on track to bring in about $40 billion of revenue this year, in line with Cigna.

Centene, WellCare and Molina are primarily focused on Medicare and Medicaid, government-sponsored coverage for the elderly and the poor, respectively. Those are growing areas as the aging baby boomer population pushes Medicare enrollment higher and state governments with tight budgets shift more Medicaid patients to managed-care companies. But the beauty of a deal with Cigna is that it offers exposure to both government and national commercial plans. Anthem could try to snap up some Blue Cross Blue Shield plans to gain more commercial coverage, but it would have to do that on a state-by-state basis, which could be time-consuming. 

Anthem won’t be hunting for a back-up deal in a vacuum, either. UnitedHealth was considered a potential buyer for either Centene or Health Net before those two companies decided to merge. That deal closed in March, creating the biggest private provider of Medicaid and perhaps an even more attractive target for UnitedHealth. A single Cigna will also be on the prowl, armed with $1.85 billion in extra firepower, courtesy of Anthem’s breakup fee. Any pursuit of Centene, WellCare or Molina is likely to be competitive — and expensive. All three surged on Monday on the prospect they could become more likely targets. 

The irony in all of this is that it quite easily could have been Anthem, rather than Aetna, sleeping more comfortably at night with a Humana deal. Anthem was considered a bidder for Humana right up until the last minute. Some analysts thought that deal would be more appealing to Anthem strategically because of Humana’s Medicare exposure.  Perhaps Anthem bet on the wrong horse. Now it could find itself off the racetrack.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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