(Adds details from CMS letter to Cigna, closing stock prices, byline)
NEW YORK, June 16 (Reuters) - Cigna Corp, which was prevented from selling new Medicare Advantage health insurance for 18 months, said on Friday the U.S. government was allowing new enrollments starting July 1 after program deficiencies were corrected.
The Centers for Medicare and Medicaid Services suspended the program in January 2016, citing "widespread and systemic" failures that barred patients from accessing medical services.
The government told Cigna in a June 16 letter that it could now market Medicare Advantage as well as its Medicare prescription drug plans, which are available to people aged 65 or older and the disabled.
Wall Street analysts said the development increased chances of Cigna buying Medicare Advantage specialist Humana Inc or participating in a different merger. Both companies had been pursuing separate takeover deals but failed on antitrust grounds.
"Not only does the announcement bode well organically for Cigna and its re-entry into the 2018 Medicare Advantage selling season, it paves the way for a potential divestiture of the legacy HealthSpring Medicare Advantage book and a bid for Humana," Leerink Partners analyst Ana Gupte said in a note.
Gupte is among several analysts who have recently written research notes about a possible deal between Cigna and Humana after meeting with officials from both insurers. Neither company has confirmed seeking such a tie-up.
Cigna shares rose 1.1 percent to close at $169.07, and Humana was up 0.9 percent at $234.46 on the New York Stock Exchange.
The Centers for Medicare and Medicaid Services letter said other findings called for additional monitoring and reporting by Cigna, and that it would issue a notice of corrective actions.
The government imposed the sanctions on Cigna after it found in a 2015 audit that the insurer did not handle complaints and grievances properly from patients who had been denied coverage for health benefits or drugs. It also found problems with Cigna's handling of its list of covered drugs. The 18-month period is fairly typical for sanctions, which had been levied on competitor Aetna Inc. (Reporting by Caroline Humer; Editing by Leslie Adler and Richard Chang)