The commission declined Southern Cross's application to buy Aetna as concerns remained that Southern Cross would end up with a dominant position in medical insurance.
Southern Cross and Aetna are the two biggest players in the market, with a combined market share of close to 80%.
It was doubted that the bigger company would face effective constraint from existing or potential competitors if it tried to raise prices significantly, or reduce services or benefits.
Aetna came on the market after its United States parent sold its financial services arm to Dutch-based ING Group for $US7.7 billion ($17.7 billion) and announced its intention to divest its international activities.
Southern Cross argued in its submission to the commission that low barriers to entry and low switching costs for consumers would restrain the impact of any increase in dominance.
In its application for clearance a month ago, Southern Cross said it did not believe any dominance issues arose, but had made its application "as a matter of prudence due to the impression that might be created by the merged entity's market share."
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