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Merger hopes for Aetna-Humana remain, Anthem-Cigna not so much

Merger hopes for Aetna-Humana remain, Anthem-Cigna not so much

Despite the U.S. Department of Justice's move to block the billion-dollar mergers between four of the largest national health insurers, analysts say at least one of the deals could still get the green light.

Aetna Inc.'s $37 billion deal with Humana Inc. stands a chance to win in federal court against federal antitrust regulators, who sued Thursday to halt the transaction that they say will reduce competition and harm consumers and health care quality.

But another $54 billion union between Anthem Inc. and Cigna Corp., which was also sued Thursday by the Justice Department on anticompetitive grounds, will likely fall apart in court if not before, they say.

“We believe that a settlement including divestitures is still probable, and in fact we think that Aetna has a relatively strong case should this eventually make it to court” Barclays P.L.C. analysts said in a Friday research report.

“I think there's a higher probability of the Aetna (deal),” said Stephen Zaharuk, New York-based senior vice president at Moody's Investors Service Inc. “They were out there shopping some of the businesses that they knew were going to be a problem for the DOJ, (and) they have a very solid argument in how you look at the competition.”

On the other hand, “the deck seems to be stacked against” the Anthem-Cigna combination, Mr. Zaharuk said.

However, some analysts predict neither deal will win in court.

“We see the likelihood of any settlement or win for the companies in court as slim given the political nature of the outcome and the tone of the communication from the DOJ,” Leerink Partners L.L.C. analyst Ana Gupte said in a Friday research note.

Observers say the Justice Department lawsuits filed in the U.S. District Court for the District of Columbia could take months to resolve. Most of the health insurers vowed to fight the complaints, though Cigna said Thursday it “is currently evaluating its options” and added that the deal could close in 2017 at the earliest, “if at all.”

“That doesn't sound like they are really committed to this process,” Mr. Zaharuk said.

“Given the animosity between the two parties, we would expect a termination agreement in the relatively near term,” Barclays analysts said of the Anthem-Cigna deal.

The Aetna-Humana case will hinge on whether Medicare Advantage competes with traditional Medicare, analysts say.

The Justice Department argued in its complaint that the two are distinct products that don't compete. “Many seniors using Medicare Advantage are unlikely to consider any of the traditional Medicare products to be adequate alternatives for Medicare Advantage,” the Justice Department said in its complaint.

But analysts say the health insurers have a strong argument that the two products do in fact compete, thus alleviating some anticompetitive concerns.

“One of the things I thank Assistant Attorney General Baer for is noting very importantly that Medicare Advantage was started as a competitive product to Medicare fee-for-service, something that the DOJ did not consider in their analysis of overlapped markets,” Aetna Chairman and CEO Mark Bertolini said in an interview with CNBC.

Additionally, the Justice Department argued that Aetna and Humana have not proposed divestitures that will adequately replace competition in the markets they exit.

But Mr. Bertolini said during the CNBC interview that Aetna has provided “two separate bidders with complete bids, sign-able contracts, that would buy the whole business from us” in each of the problem markets the Justice Department pinpointed.

Centene Corp. on Tuesday said it is not bidding for Aetna's divested business, as was previously speculated.

The Anthem-Cigna union will have a tougher time explaining how its combination won't harm the many national and local employers the companies serve.

There are also other questions surrounding how Anthem and Cigna could work together, given “complications relating to Anthem's membership in the Blue Cross and Blue Shield Association,” the Justice Department's complaint states.

“It becomes messier (and) it becomes harder to explain,” Mr. Zaharuk said.

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