Even if feds stop mega-merg­ers, new in­surer trans­ac­tions likely

Modern Healthcare - - NEWS - By Bob Her­man

Nearly ev­ery­one in health­care spec­u­lated for the past year about how the U.S. Jus­tice Depart­ment would re­spond to the mega-deals pro­posed by Aetna and An­them. Of­fi­cials were con­cise and stern as they de­liv­ered their an­swers from a podium last week.

“Aetna’s ac­qui­si­tion of Hu­mana and An­them’s ac­qui­si­tion of Cigna may be a con­ve­nient short­cut to in­creased prof­its for those com­pa­nies,” said Bill Baer, one of the depart­ment’s top an­titrust of­fi­cials. “But the an­titrust laws make clear that merg­ers are not law­ful when they risk deny­ing con­sumers the ben­e­fits of com­pe­ti­tion.”

U.S. At­tor­ney Gen­eral Loretta Lynch said that if the deals were al­lowed, “not only the bank ac­counts of the Amer­i­can peo­ple would suf­fer, but also the Amer­i­can peo­ple them­selves.”

But even if the fed­eral gov­ern­ment buries An­them’s $53 bil­lion ac­qui­si­tion and Aetna’s $37 bil­lion pur­chase, the big five health in­sur­ers (which also in­clude Unit­edHealth Group) are likely to forge new trans­ac­tions to scale up and im­prove their po­si­tion at the bar­gain­ing ta­ble with con­sol­i­dat­ing hos­pi­tals and health sys­tems.

“It’s still a pretty frag­mented in­dus­try,” Jeff Loo, an eq­ui­ties an­a­lyst at Stan­dard & Poor’s Global Mar­ket In­tel­li­gence, said of health in­sur­ers. “If the big five re­mains and if they make a bid for one of the smaller play­ers, I don’t think the Depart­ment of Jus­tice would have that strong of an ar­gu­ment to stop it.”

Many peo­ple main­tain that the in­sa­tiable ap­petite to bulk up is a re­sult of health­care re­form, which en­cour­ages hos­pi­tals, doc­tors and in­sur­ers to cre­ate more co­he­sive sys­tems of care. “There’s a lot in the Af­ford­able Care Act for groups to merge,” said Mar­i­anne Udow-Phillips, di­rec­tor of the Cen­ter for Health­care Re­search and Trans­for­ma­tion at the Uni­ver­sity of Michi­gan.

Cen­tene Corp., Molina Health­care and Wel­lCare Health Plans, all pub­licly

traded in­sur­ers, are log­i­cal tar­gets be­cause of their rel­a­tively smaller size. Cen­tene, which re­cently ac­quired Health Net, has an an­nual rev­enue base of $40 bil­lion, while Molina and Wel­lCare both posted rev­enue of $14 bil­lion last year. That com­pares with Unit­edHealth, on pace for $182 bil­lion in rev­enue this year, or 5% of the en­tire health­care econ­omy. Aetna, An­them and Hu­mana all have rev­enue above $50 bil­lion. Cigna ranks last among the big five, with about $38 bil­lion in 2015 rev­enue.

An­other at­trac­tive el­e­ment of Cen­tene, Molina and Wel­lCare is their pri­mary fo­cus on Med­i­caid, a pro­gram that has seen heavy en­roll­ment growth across the coun­try due in large part to the ACA’s Med­i­caid ex­pan­sion.

“More Med­i­caid is go­ing to go man­aged care, so I think that’s a real po­ten­tial mar­ket,” Udow-Phillips said. Cen­tene and Wel­lCare also have sig­nif­i­cant mar­ket share in Medi­care Ad­van­tage, a prized as­set for most large in­sur­ers to­day.

Univer­sal Amer­i­can Corp., which spe­cial­izes in Medi­care Ad­van­tage and ac­count­able care or­ga­ni­za­tions, and Mag­el­lan Health, a man­aged-care com­pany with a large phar­macy ben­e­fits arm, could be­come easy tar­gets as well. Even some in­de­pen­dent re­gional in­sur­ers may sit in the crosshairs of the large car­ri­ers, espe­cially if they sell health plans in im­por­tant growth mar­kets. A new round of deal­mak­ing pre­sumes the An­them-Cigna and Aet­naHu­mana trans­ac­tions are on their deathbeds. The Jus­tice Depart­ment was adamant in its com­plaints that both deals would de­stroy com­pe­ti­tion in the em­ployer, Medi­care Ad­van­tage and ACA mar­ket­places, and ex­perts be­lieve there is some weight in the gov­ern­ment’s ar­gu­ments.

“His­tory is with the Depart­ment of Jus­tice,” said Leemore Dafny, a health econ­o­mist at Har­vard Busi­ness School who wrote about the detri­men­tal ef­fects of the Aet­naPru­den­tial merger of 1999. “If past is pro­logue, th­ese merg­ers aren’t likely to ben­e­fit con­sumers.”

Jeff Miles, an an­titrust at­tor­ney with Ober Kaler, said the chances of win­ning against fed­eral reg­u­la­tors who want to block a merger are “very poor” th­ese days.

In the case of An­them and Cigna, where there has been con­tention from the out­set, there is a high prob­a­bil­ity both com­pa­nies will want to pull the plug. An­them said it would de­fend the merger, but Cigna’s un­en­thu­si­as­tic state­ment struck a much dif­fer­ent tone. Cigna—led by CEO David Cor­dani, who failed to ac­quire Hu­mana and butted heads with An­them over his fu­ture lead­er­ship po­si­tion—said it was “eval­u­at­ing its op­tions con­sis­tent with its obli­ga­tions un­der the agree­ment.” The ear­li­est the merger could be com­pleted was 2017, “if at all,” ac­cord­ing to Cigna.

An­them faces some hur­dles if it wants to pur­sue an­other deal. The in­surer had $1.7 bil­lion in cash and cash equiv­a­lents as of March 31, the low­est of the four merg­ing par­ties, and it would owe Cigna a $1.85 bil­lion breakup fee if the trans­ac­tion crum­bles.

An­them also is in the mid­dle of a heated law­suit with phar­macy ben­e­fit man­ager Ex­press Scripts Hold­ing Co.

Cigna, mean­while, has “strong stand-alone fun­da­men­tals” and the abil­ity to “de­ploy at least $9 bil­lion” for ac­qui­si­tions if the in­surer wanted to raise its debt level, ac­cord­ing to a re­search note from Gold­man Sachs an­a­lyst Matthew Borsch. That could al­low Cigna to buy a Med­i­caid in­surer, a clear area where Cigna lacks heft, or it could try to buy Hu­mana again if both deals are aban­doned.

Ex­perts agree Aetna and Hu­mana have bet­ter odds than An­them and Cigna of con­vinc­ing the court that com­pe­ti­tion could be pre­served by di­vest­ing over­lap­ping health plans. But those odds still may be slim. The com­pa­nies will have to con­vince a judge that tra­di­tional Medi­care and Medi­care Ad­van­tage are com­pet­ing mar­kets—a the­ory that many health economists dis­miss and the Jus­tice Depart­ment re­jected.

But Loo said Aetna and Hu­mana ex­ec­u­tives will make that ar­gu­ment “un­til they’re blue in the face.” And he and other fi­nan­cial an­a­lysts think they can win.

“I view them as one mar­ket be­cause when you’re el­i­gi­ble for Medi­care, you’re au­to­mat­i­cally placed in the tra­di­tional plan,” Loo said. “You need to ac­tively choose the Medi­care Ad­van­tage plan.” Aetna had $3.8 bil­lion in cash at the end of the first quar­ter, and it is­sued $13 bil­lion of new debt in an­tic­i­pa­tion of buy­ing Hu­mana—money that al­most cer­tainly would be used on other ac­qui­si­tions if the Hu­mana deal falls through. How­ever, Aetna would have to pay a $1 bil­lion ter­mi­na­tion fee to Hu­mana.

Aetna CEO Mark Ber­tolini told CNBC his com­pany would “vig­or­ously de­fend” the trans­ac­tion. He also said dur­ing a con­fer­ence last year that or­ganic growth re­mains a pri­or­ity for Aetna be­cause “sooner or later, you run out of as­sets to buy.”

No mat­ter if the health in­sur­ers win their bat­tles with the Jus­tice Depart­ment or if there is an­other round of fre­netic speed-dat­ing, many ob­servers hope the com­pa­nies in­vest re­sources in that or­ganic growth.

“I’d like the in­sur­ers to sit back down and fig­ure out how they’re go­ing to earn their cus­tomers and in­no­vate,” said Dafny, who pre­vi­ously worked for the Fed­eral Trade Com­mis­sion as deputy di­rec­tor for health­care an­titrust. “Some ac­qui­si­tions may make sense, but I’d like to see some new think­ing on their part.”

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