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Justice Department nearing decision on health insurer mergers

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Roughly a year since four major U.S. health insurers struck deals to merge, federal antitrust regulators are close to issuing a decision.

Proposed deals to combine Aetna Inc. and Humana Inc., as well as Anthem Inc. and Cigna Corp. are nearing the tipping point: Aetna this week secured its 18th of 20 approvals needed to take over rival Humana, an Aetna spokesman said.

New York state insurance regulators gave conditional approval of the merger, Bloomberg reported Monday. A spokesman for the New York Department of Financial Services declined to confirm the approval.

Next up, Georgia is scheduled to hold a public hearing July 26 on the proposed $37 billion Anthem-Cigna deal. The $54.2 billion Anthem-Cigna deal is farther behind with 12 of 26 necessary state approvals.

However, the U.S. Justice Department is expected to make a decision in both deals as soon as mid-July.

Aetna on Friday reportedly met with Justice Department officials to make its case, just two weeks after a similar meeting between regulators and Anthem and Cigna executives, according to Bloomberg.

Aetna-Humana more likely

Generally, analysts agree that the Aetna-Humana deal is more likely to win approval than the Anthem-Cigna merger, but most observers caution that the deals are unprecedented and make predictions difficult to make.

“I don't see it happening,” said Stephen Zaharuk, New York-based senior vice president at Moody's Investors Service Inc., referring to the Anthem-Cigna deal. As for Aetna's merger with Humana, “I'm more confident.”

“We still see this deal getting done,” Thomas A. Carroll, analyst at Stifel, Nicolaus & Co., said of the Aetna-Humana deal in a research note last week.

Analyst Ana Gupte with Leerink Partners L.L.C. estimates that the Aetna-Humana deal has an 80% chance of closing, while the Anthem-Cigna merger has a less than 50% chance, according to recent research notes.

The Justice Department's review focuses on the impact of the proposed mergers on competition, and whether certain divestitures could maintain competition, antitrust experts say.

Concerns about the Aetna and Humana merger largely revolve around its impact on competition in the Medicare Advantage market. Aetna and Humana combined would cover about 4.5 million out of a total 17.6 million individuals enrolled in Medicare Advantage plans — nearly a quarter of the market. But the combined organization would cover only 8% of the entire Medicare market, including traditional Medicare and Medicare Advantage, according to the Center for American Progress.

Aetna's position has been that Medicare Advantage and Medicare compete, thus lessening post-merger competition concerns. Historically, however, the Justice Department has considered them to be two distinct markets that don't compete, said Thomas Greaney, an antitrust expert formerly with the Justice Department's antitrust division who is now co-director of the Center for Health Law Studies at Saint Louis University School of Law.

Anthem and Cigna deal mainly with the employer market and cater to many self-insured employers who contract only for administrative services. Analysts say there are few administrative services providers to absorb divestitures.

If the Justice Department were to sue and a judge block the mergers, Anthem would owe Cigna a $1.85 billion breakup fee, and Aetna would owe Humana $1 billion, according to their merger agreements.

Both Anthem and Aetna should be able to stomach those losses, as they've been building cash this year to subsidize the mergers, said James Sung, associate director and insurance credit analyst at Standard & Poor's Corp. in New York.

Even without Humana, Aetna will remain stable, Mr. Zaharuk said.

“It was a nice strategic move to buy Humana, (but) I don't think it's necessary for Aetna in its overall strategic plans,” he said.

On the other hand, Anthem was looking to become “more of a national company” beyond the 14 states where it sells insurance under the Blue Cross Blue Shield name, he said. Without the Cigna deal, Anthem will have to go “back to the drawing board, and they are going to have to reset their strategy.”