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Health insurer megamergers not all wrapped up

Federal scrutiny could trump shareholder votes

Health insurer megamergers not all wrapped up

Ramped-up antitrust scrutiny may present mergers involving four of the largest national health insurers with bigger roadblocks.

Deals linking Aetna Inc. and Humana Inc., as well as Anthem Inc. and Cigna Corp., have ignited a debate over megamergers and the reduced competition, increased insurance prices and diminished health plan quality some critics say consolidation would bring.

But while shareholders for each of the companies have given the deals the green light and their CEOs maintain confidence in closing by the second half of 2016, experts say the transactions are far from a sure thing.

“This is not a slam dunk in either direction,” said Barak Richman, a professor of antitrust law and health care policy at Duke University School of Law in Durham, North Carolina.

In recent years, antitrust enforcement has seemingly increased, though some experts say that could be a result of more large-scale mergers being proposed, likely due to a stronger economy.

According to a March report by law firm Gibson Dunn & Crutcher L.L.P., the rate at which federal agencies investigate mergers and acquisitions is growing, and 2015 could be a “banner year for DOJ's merger enforcement efforts,” the report states.

According to the report, between 2006 and 2008, antitrust enforcement agencies brought an average 34 merger enforcement actions per year. That number rose to 41 on average annually between 2010 and 2012. The agencies challenged 38 mergers in 2013. Gibson Dunn expects that 2014 data will show the agencies “continue to challenge transactions at a relatively high rate,” the report states.

The Department of Justice, which is reviewing the Aetna-Humana and Anthem-Cigna mergers, has in recent months blocked large-scale deals between companies in the manufacturing sector.

Most recently, General Electric Co. and AB Electrolux in December called off a deal that would bring together two leading kitchen appliance makers. Earlier that month, Tri-Union Seafoods L.L.C., doing business as Chicken of the Sea International, and Bumble Bee Foods L.L.C. abandoned a deal that would combine the second- and third-largest canned tuna sellers in the country.

The Justice Department objected to both, citing reduced competition, which the agency said could lead to higher prices for consumers.

Justice also in 2015 investigated highly publicized deals between Comcast Corp. and Time Warner Cable Inc. and AT&T Inc. and DirecTV L.L.C., among others. While AT&T and DirecTV completed their merger in July, Comcast and Time Warner in April called theirs off over the Justice Department concerns.

Still, according to Mr. Richman, “you cannot say past is prologue.”

Each merger is “highly context dependent,” he said. Whether a merger is approved will “depend very deeply on the nature of competition, the nature of the industry, (and) how easy entry is,” among other factors. Mergers “all vary enormously.”

Even so, the Justice track record for health insurance mergers seems to show a clear pattern. The department has challenged seven mergers in the past, and only one was blocked while the others proceeded after certain divestitures, a department spokesman said.

The current deals, however, are “much bigger,” Mr. Richman said. Plus, “we're learning a little bit more from those other mergers, and there's better data now on the consequences of concentration.”

Studies show that increased consolidation in the health insurance industry leads to higher premiums for consumers, according to testimony by Leemore S. Dafny, a former regulator and now a professor at the Kellogg School of Management at Northwestern University in Evanston, Illinois, before the U.S. Senate subcommittee on health insurance industry consolidation in September.

Such was the case when Aetna merged with Prudential HealthCare in 1999, according to a 2012 study co-authored by Ms. Dafny.

The study found that large group premiums grew about 7%, or $200 per person, between 1998 and 2006 because of increased market concentration following the merger.

“It all comes down to the numbers,” 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. Antitrust regulators will slice the data in different ways — among geographic and product lines — and they will “probably find overlaps in a substantial number of places. Then it's a matter of how many divestitures would satisfy (them),” Mr. Greaney said.

A September analysis by the American Medical Association found that the two megamergers would slash competition in up to 154 metropolitan areas in 23 states.

And divestitures don't solve all the problems, sources say. One of the biggest hurdles is finding another insurer that's a “suitable replacement” in the markets in which the merging insurers divest operations. “It can be a little problematic,” Mr. Greaney said.

Further complicating things is the states' role in approving the mergers.

This “isn't just a ballgame” for the Justice Department, explained David Balto, a Washington-based antitrust lawyer and former policy director for the Federal Trade Commission. State insurance commissioners will be reviewing the mergers and will likely take a “tough stance,” Mr. Balto said.

After December public hearings in Florida on the mergers, a coalition of nine consumer groups and unions there penned a letter Dec. 16 to the state's Insurance Commissioner Kevin McCarty raising concerns over the effects of the proposed consolidation on the state's health insurance markets.

“Scholarly evidence suggests that consumers will see limited to no benefits and instead will face higher costs, less innovation and potentially lower quality of care,” the letter states.

Most sources said it's unclear what the Justice Department will decide to do. It is likely to be a long negotiation process, and if negotiations fall apart, the health insurers may go to court with the department to force a decision or they could call the deals off.

Mr. Balto sees the Justice Department going “to court to block the mergers. And that's the right answer.”

Mr. Richman, however, said it could go either way. “This is not an administration that challenges everything, and it's been criticized for challenging both too much and not enough,” he said.