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Aetna purchase of Humana to face regulatory hurdles

Posted On: Jul. 6, 2015 12:00 AM CST

Senior executives at Aetna Inc. said on Monday that they're prepared for regulators' review of their proposed merger with rival health insurer Humana Inc., whether it is reviewed alone or in tandem with other large deals within the industry.

During a conference call with investment analysts Monday morning, Aetna and Humana's senior leaders addressed the potential for delays in closing their proposed $37 billion merger due to heightened scrutiny in the U.S. Justice Department's review of the deal, especially if another transaction among the nation's largest health insurers is announced in the near term.

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“Currently we anticipate that our transaction will be viewed alone, but it could be bundled together (with other deals) at some point,” Shawn Guertin, Aetna's chief financial officer and executive vice president, said during the conference call. “We don't want to predict how the regulators will look at, but I don't think it affects our timeframe in any way, shape or form. We're prepared to deal with any circumstance that comes along.”

Mr. Guertin declined to speculate on specific elements of the Justice Department's upcoming review of the proposed merger, including whether it will consider Aetna's group insurance and retail insurance segments separately when it calculates the effects of geographic overlaps with Humana's business lines.

Aetna executives said they expect to close the purchase of Humana in the second half of 2016. Once completed, the combination of Aetna and Humana will result in the nation's second largest publicly traded health insurer by revenue and total membership.

While Aetna and Humana operate in many of the same states — Texas, Illinois, Ohio and Florida are among both companies' top 10 states in terms of members serviced — the companies' concentrations in their lines of business are notably distinct.

Seventy-six percent of Humana's projected $54 billion in revenue this year will be generated from Medicare and Medicaid enrollments, compared with 38% of Aetna's projected $61 billion in 2015 revenue.

“We expect the deal will close with divestitures in pockets to address anti-trust scrutiny, though Aetna's group Medicare Advantage exposure is likely to be less scrutinized in a combination,” said Ana Gupte, managing director at Leerink Partners L.L.C. in an email on Friday, following the companies' announcement of the deal.

An analysis by New York-based SNL Financial Inc. indicated that a merger between Aetna and Humana would likely not exceed the Justice Department's threshold for market concentration in the individual and group insurance markets, but could raise concerns in the Medicare and Medicare Advantage markets.

Still, analysts said the merger could face a tougher test if it is reviewed alongside other transactions, particularly the anticipated combination of Anthem Inc. and Cigna Corp.

“I think the regulatory agencies are concerned about these mergers, not so much because of what it does on a market-by-market basis, but what it does to the overall picture when you look at choices in health insurance,” said Stephen Zaharuk, senior vice president at Moody's Investors Service Inc. in New York. “They're going to be more limited for everyone in the marketplace. There could also be some concern about price competition as well.”

Other issues discussed during Monday's call with analysts included Humana's financial performance on individual medical plans purchased through federal and state insurance exchanges established under the Patient Protection and Affordable Care Act, as well as the combined company's strategy for leveraging Humana's brand, workforce and physical assets going forward.

Specifically, analysts expressed concern about Humana's reliance on stabilization programs built into the health care reform law to protect insurers from adverse risk selection and pricing volatility within the exchanges, including the transitional reinsurance and the temporary risk corridor programs — both of which will end in 2016 — and the permanent risk adjustment program, often referred to as the “3Rs.”

Humana expects to receive between $450 million and $500 million from the stabilization programs in 2015 to offset medical claim costs and pricing deficiencies within its exchange-based products, with roughly 75% of those funds coming from the temporary reinsurance program, according to company reports.

“It's something that we're obviously going to watch and monitor closely, but it's something that we ultimately did get comfortable with,” Mark Bertolini, Aetna's chairman and CEO, said during Monday's call. “I think a lot of the problems and causal factors in (Humana's) business have been identified, and I know that we ourselves have had various discussions with state departments of insurance about whether if the 3Rs — particularly risk adjustment — came in differently, we would have the ability to potentially look at rates again.”

“I also think we're likely going to get another bite at the apple in terms of pricing cycles before this transaction closes, so pricing decisions and market participation will be determined at that time,” Mr. Bertolini added.

Mr. Bertolini also discussed what will become of Humana's branding and corporate headquarters in Louisville, Kentucky.

Under the terms of the proposed merger, Mr. Bertolini said Humana will retain its current name and continue to operate from Louisville as the combined company's government-sponsored accounts arm, generating approximately 56% of the new entity's projected $115 billion in total revenue.

“Louisville will an important site for us,” Mr. Bertolini said. “We anticipate that, given the amount of revenue that will be based there, that we'll at least maintain the employment level there, if not increase it.”