Aetna’s an­titrust de­feat may sig­nal the end of health in­sur­ance mega-merg­ers

Modern Healthcare - - NEWS - By Shelby Liv­ingston

The con­sol­i­da­tion among the big­gest health in­sur­ance play­ers that seemed so in­evitable not long ago may fiz­zle into a se­ries of smaller deals aimed at grow­ing mar­ket share in Medi­care and Med­i­caid plans.

Aetna’s $37 bil­lion play for Hu­mana, an­nounced 19 months ago, ap­peared to be on its deathbed last week. A fed­eral judge is­sued an or­der block­ing the trans­ac­tion, agree­ing with the U.S. Jus­tice De­part­ment’s ar­gu­ments that al­low­ing it to hap­pen would harm con­sumers in the Medi­care Ad­van­tage and in­di­vid­ual in­sur­ance mar­kets.

While the com­pa­nies may ap­peal the de­ci­sion, in­dus­try an­a­lysts were du­bi­ous of their chances. A dif­fer­ent judge as of last week had yet to rule on gov­ern­ment’s case against a merger of two of the other “big five” in­sur­ers, An­them and Cigna. But that deal faced even greater odds from the start be­cause the com­pa­nies com­pete head to head for na­tional ac­counts with big em­ploy­ers.

If these mega-merg­ers do fall apart, the com­pa­nies will still be look­ing for part­ners, and they’ll have money to spend. “All four of these com­pa­nies are too big now to meet Wall Street ex­pec­ta­tions through or­ganic growth,” said John Gor­man, a for­mer fed­eral health­care of­fi­cial who is now a con­sul­tant in Wash­ing­ton. “They have to ac­quire.”

But the opin­ion de­liv­ered last week in the Aetna-Hu­mana case will com­pli­cate any union of com­pa­nies with sig­nif­i­cant as­sets in Medi­care Ad­van­tage, the pro­gram that al­lows ben­e­fi­cia­ries to choose pri­vate man­aged-care plans in lieu of tra­di­tional Medi­care.

And choos­ing part­ners could prove dif­fi­cult un­der a new ad­min­is­tra­tion and Congress poised to dis­rupt ev­ery seg­ment of the health in­sur­ance in­dus­try. Very few things in health in­sur­ance seem like a safe bet any­more.

The com­bi­na­tion of Aetna and Hu­mana would cre­ate the largest Medi­care Ad­van­tage in­surer in the na­tion. The com­pa­nies also com­pete for busi­ness with in­di­vid­ual plans sold on the Af­ford­able Care Act’s ex­changes, al­though both com­pa­nies pulled out of many of the mar­ket­places in the months since agree­ing to merge. (In fact, the judge in the an­titrust trial con­cluded Aetna pulled out of ex­changes to fol­low through on its threat that it wouldn’t be able to main­tain its par­tic­i­pa­tion if the Obama ad­min­is­tra­tion blocked the deal.)

Aetna and Hu­mana claimed com­bin­ing the com­pa­nies would lead to lower prices and bet­ter ben­e­fits for se­niors. The Jus­tice De­part­ment chal­lenged the trans­ac­tion in July 2016, ar­gu­ing it would al­low them raise pre­mi­ums and re­duce ben­e­fits and would sti­fle in­no­va­tion. The court bat­tle lasted 13 days and wrapped up at the end of De­cem­ber.

U.S. District Judge John D. Bates de­cided that any ef­fi­cien­cies achieved were un­likely to out­weigh the dam­age. He also said the in­sur­ers ne­glected to prove that any sav­ings reaped through the merger would reach health plan mem­bers. At­tor­neys and an­titrust ex­perts said Bates’ 158-page opin­ion was thor­ough and grounded in facts, giv­ing the in­sur­ers lit­tle chance of win­ning on ap­peal.

The de­ci­sion, as­sum­ing it’s up­held, es­tab­lished an im­por­tant prece­dent by set­tling a ques­tion that had yet to be de­cided in court: Do Ad­van­tage plans com­pete for cus­tomers with tra­di­tional fee-for-ser­vice Medi­care?

Bates con­cluded that the an­swer is no, so al­low­ing the merger to go for­ward would harm com­pe­ti­tion among Ad­van­tage plans in 364 coun­ties. The stan­dard will make it nearly im­pos­si­ble for large Medi­care Ad­van­tage car­ri­ers to com­bine since the busi­ness is al­ready dom­i­nated by four ma­jor play­ers.

It’s a “sig­nif­i­cant set­back to the in­dus­try from a con­sol­i­da­tion per-

spec­tive,” Bar­clays an­a­lyst Joshua Raskin wrote in a re­search note.

That doesn’t mean no two in­sur­ers that op­er­ate in Ad­van­tage would be al­lowed to merge, said Martin Gaynor, a health econ­o­mist at Carnegie Mel­lon Univer­sity. An­titrust de­ci­sions are based on facts spe­cific to each case. But it does mean “they would be fac­ing a very tough time,” Gaynor said. “This case draws a line in the sand on that.”

For ex­am­ple, Hu­mana, which serves 3.2 mil­lion Medi­care Ad­van­tage mem­bers, and Aetna with its 1.4 mil­lion Medi­care Ad­van­tage mem­bers, would face se­ri­ous ob­sta­cles if ei­ther wanted to join up with Unit­edHealth, the largest in­surer in the space with nearly 4 mil­lion Ad­van­tage cus­tomers as of De­cem­ber. (Unit­edHealth pre­vi­ously of­fered to ac­quire Aetna ac­cord­ing to dis­clo­sures Aetna filed re­lated to the Hu­mana deal.)

The com­pa­nies do have other op­tions. Aetna, Hu­mana, An­them and Cigna might be fine on their own if both deals are ul­ti­mately blocked. In par­tic­u­lar, Aetna and Hu­mana “were both strong in­de­pen­dent op­er­a­tors be­fore this pro­posed deal, and they will con­tinue to be strong op­er­a­tors if this deal never goes through,” said Jef­frey Loo, an eq­ui­ties an­a­lyst at Stan­dard & Poor’s Global Mar­ket In­tel­li­gence.

They are both sit­ting on cash ready to be spent. If the deals fall through, Aetna will owe Hu­mana a $1 bil­lion breakup fee and An­them will owe Cigna $1.85 bil­lion, which can be used to fund other ac­qui­si­tions or in­vest­ments.

In Novem­ber, Cigna CEO David Cor­dani told in­vestors that the Bloom­field, Conn.-based in­surer would have be­tween $7 bil­lion and $14 bil­lion in de­ploy­able cap­i­tal in the sec­ond half of 2017, in­clud­ing about $5 bil­lion in liq­uid cash, to po­ten­tially be used to ex­pand through other merg­ers and ac­qui­si­tions.

In­di­anapo­lis-based An­them also told in­vestors in Novem­ber that it ex­pects to “re­sume cap­i­tal de­ploy­ment ac­tiv­ity in 2017,” though the tim- ing would de­pend on what hap­pens with the Cigna deal.

Hart­ford, Conn.-based Aetna has said it has a “plan B” but kept de­tails close to the vest. In­vest­ment firm Bar­clays es­ti­mates that Hu­mana will have $4.7 bil­lion in cap­i­tal ready for de­ploy­ment, while Aetna will have $4.3 bil­lion.

An­them or Cigna could make a go at buy­ing Louisville, Ky.-based Hu­mana.

They’d “both like to ex­pand their Medi­care Ad­van­tage ex­po­sure,” which is the best place to be in the new po­lit­i­cal re­al­ity, said Ana Gupte, an­a­lyst at Leerink Part­ners. Many GOP law­mak­ers fa­vor turn­ing Medi­care into a pre­mium-sup­port sys­tem, which would push more Medi­care mem­bers into pri­vate plans. Cigna al­ready made over­tures for Hu­mana be­fore get­ting el­bowed out of the pic­ture by Aetna.

These po­ten­tial com­bi­na­tions have less over­lap in Medi­care Ad­van­tage, mak­ing it more fea­si­ble they could pass muster. Both sce­nar­ios, though, would re­quire the com­pa­nies to un­load some Ad­van­tage as­sets to win clear­ance.

A more likely sce­nario, how­ever, is a wave of deals in Med­i­caid.

Med­i­caid man­aged-care in­sur­ers Cen­tene Corp., Molina Health­care and Wel­lCare are “the pret­ti­est girls at the dance right now” in terms of pos­si­ble tar­gets, Gor­man said. Aetna has a weak Med­i­caid pres­ence and might make a play for one of those com­pa­nies, ac­cord­ing to Gupte.

But even though states have moved rapidly to­ward pay­ing man­aged-care com­pa­nies to ad­min­is­ter Med­i­caid ben­e­fits, that busi­ness is sud­denly un­cer­tain as Pres­i­dent Don­ald Trump and con­gres­sional Repub­li­can lead­ers push to con­vert Med­i­caid into a block-grant sys­tem, a model that health pol­icy ex­perts say would likely lead to fund­ing cuts.

Com­pa­nies that tra­di­tion­ally have done more busi­ness in Med­i­caid, mean­while, are ex­pand­ing into Medi­care Ad­van­tage, such as Cen­tene with its Health Net ac­qui­si­tion and Wel­lCare with its Univer­sal Amer­i­can deal.

An­other plau­si­ble sce­nario is that in­sur­ers will take the cap­i­tal to build a health­care services unit like Unit­edHealth’s Op­tum, S&P’s Loo said. Op­tum is the most prof­itable unit of Unit­edHealth and helps to di­ver­sify the in­surer’s rev­enue through its phar­macy ben­e­fit man­ager and am­bu­la­tory-care providers. Ex­press Scripts and CVS Health, Gupte says, could po­ten­tially pair up with Hu­mana.

Deals struck in the com­ing months will take place un­der the new ad­min­is­tra­tion that’s ex­pected to be more per­mis­sive on an­titrust mat­ters than the Obama ad­min­is­tra­tion. In fact, then­Pres­i­dent-elect Trump ear­lier this month met with the CEOs of Mon­santo and Bayer to dis­cuss their pro­posed $66 bil­lion deal to form an agribusi­ness gi­ant. Shortly af­ter, White House Press Sec­re­tary Sean Spicer said the com­bined com­pany would cre­ate thou­sands of new jobs. Trump him­self also tweeted sup­port.

The sit­u­a­tion raised alarm bells for an­titrust ex­perts who say the Jus­tice De­part­ment’s de­ci­sions should re­main in­de­pen­dent from the White House. Trump’s will­ing­ness to get in­volved in cor­po­rate deal­mak­ing and his em­pha­sis on dereg­u­la­tion may give hope to health in­sur­ers look­ing for their next deal. ●

Deals struck in the com­ing months will take place un­der the new ad­min­is­tra­tion that’s ex­pected to be more per­mis­sive on an­titrust mat­ters than the Obama ad­min­is­tra­tion.

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