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UPDATE 2-U.S. appeals court blocks Anthem bid to merge with rival Cigna

(In 9th paragraph, correct's description of Bill Baer to former head of the Justice Department's Antitrust Division, not former head of the Justice Department.)

By Diane Bartz

WASHINGTON, April 28 (Reuters) - A U.S. appeals court on Friday blocked health insurer Anthem Inc's bid to merge with Cigna, upholding a lower court's decision that the $54 billion deal should not be allowed because it would lead to higher prices for healthcare.

The ruling will probably kill the proposed merger that was opposed by the U.S. Justice Department, 11 states and a district court judge after consumers, medical professionals and others objected to it. In the end, Cigna itself tried to back out.

The companies have the option of trying to save the deal by asking the appeals court to re-consider the case or appealing straight to the U.S. Supreme Court.

Two hours after the decision, Cigna traded at $155.65 and Anthem was at $177.45. Both were down less than half a percent.

Anthem's purchase of Cigna would create the largest U.S. health insurer. Rivals Aetna Inc and Humana Inc had also sought to merge but that deal collapsed this year amid opposition from the federal government and states.

Insurers made the deals as they adjusted to new pressures from the insurance overhaul of Obamacare, officially known as the Affordable Care Act. Now they face the potential for another remaking of the industry, though the exact changes are unclear because of Republican disagreements over how to repeal and replace Obamacare.

In a split decision, the U.S. Court of Appeals for the D.C. Circuit disagreed with Anthem's contention that the Justice Department and lower court improperly rejected its assertions that the deal would lead to billions of dollars in medical savings.

"Anthem has not explained why these projected savings would even exist," Judge Judith Rogers wrote in the opinion. "The record is clear that Anthem, unlike Cigna, has already achieved whatever economies of scale are available."

Bill Baer, a former head of the Justice Department's Antitrust Division, said in an email the decision "is a ringing endorsement of the importance of competition in health insurance markets."

Baer made the decision to challenge both insurance mergers.

New York Attorney General Eric Schneiderman said he was "pleased" with the ruling and contended the deal would likely lead to higher premiums and lower quality.

In a dissent, Judge Brett Kavanaugh argued that the merger would benefit the biggest customers, mainly large companies with employees in many states. Kavanaugh argued that a combined Anthem/Cigna would require higher payments to manage the accounts but that would be offset by better negotiated rates paid to providers.

Anthem, a member of the Blue Cross Blue Shield Association, is the second biggest seller of medical insurance to big U.S. companies. Cigna is in third place.

"This is a red letter day for consumers," said David Balto, who organized opposition to the deal.

In another obstacle to the deal, Anthem and Cigna are suing each other. Cigna has sought to abandon the merger and force Anthem to pay a $1.85 billion breakup fee while Anthem filed a lawsuit to force its smaller rival to go through with the combination.

Anthem and the Justice Department did not immediately respond to a request for comment on the appeals court decision. (Reporting by Diane Bartz; Editing by David Gregorio)