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Antitrust ruling on big mergers expected soon

Regulators signal some competition concerns


A U.S. Justice Department decision on the proposed mergers of Aetna Inc. and Humana Inc., and Anthem Inc. and Cigna Corp., could come as soon as this week.

Hartford, Connecticut-based Aetna met earlier this month with Justice Department officials to make its case for its $37 billion merger with Louisville, Kentucky-based rival Humana, just two weeks after a similar meeting involving the $54 billion merger of Indianapolis-based Anthem and Bloomfield, Connecticut-based Cigna, Bloomberg reported.

The meetings to address antitrust concerns sparked doubt about the Aetna-Humana deal’s chances of approval and sent several health insurers’ stock prices lower. While such meetings are common in major mergers, they also show the process is in its final stages, antitrust experts and industry analysts say.

“I think it’s very likely the DOJ has come to a tentative conclusion as to where it stands” and “what and how many markets are problematic,” said Thomas Greaney, an antitrust expert and co-director of the Center for Health Law Studies at St. Louis University School of Law.

The Justice Department’s decision could come as soon as this week.

Most analysts expect the Aetna-Humana deal to win federal approval. Aetna has clinched 18 of 20 state endorsements required to take over Humana, an Aetna spokesman said.

“What we believe is reasonable logic suggests the deal should close,” Stifel Nicolaus & Co. Analyst Thomas Carroll said last week in a research note about the Aetna-Humana merger.

In a separate research note, Leerink Partners L.L.C. Analyst Ana Gupte estimated that the Aetna-Humana deal has an 80% chance of closing, but the Anthem-Cigna deal has a less than 50% chance of being completed.

Stephen Zaharuk, New York-based senior vice president at Moody’s Investors Service Inc., was even less optimistic.

“I think it’s a 25% chance that it gets done,” Mr. Zaharuk said of the Anthem-Cigna merger. “I don’t see it happening.”

However, he said he’s “more confident” about the Aetna-Humana union.

Publicized disputes between Anthem and Cigna executives, incongruous statements by the companies regarding when the merger would close, and that Anthem has secured only 12 of 26 state approvals have fueled observers’ skepticism.

Anthem and Cigna cater primarily to the employer market and self-insured employers that contract only for administrative services. Some analysts say there are few potential buyers to absorb divestitures, which often are used to preserve competition in overconcentrated markets, of any of the ASO business.

Meanwhile, Aetna-Humana merger concerns revolve around its impact on competition in the Medicare Advantage market. Combined, they would cover about 25% of the Medicare Advantage market, but only 8% of the entire Medicare market, according to the Center for American Progress.

Aetna has argued that Medicare Advantage and traditional Medicare compete, thus alleviating anti-competition concerns. Historically, however, the Justice Department has considered them distinct markets that do not compete, Mr. Greaney said.

Still, some analysts predict divestitures could resolve such concerns.

“The overlap between the two companies’ Medicare Advantage businesses is easy to identify” and “there exists robust interest for divested assets,” Mr. Carroll said in the research note.

The health insurers also are dealing with a Justice Department that some experts say is more aggressive than past administrations. In the past two years, several mergers were abandoned due to competition objections by the Justice Department, including those between Halliburton Co. and Baker Hughes Inc., General Electric Co. and AB Electrolux, and National CineMedia Inc. and Screenvision L.L.C.

“It reflects a growing appreciation by the DOJ that divestitures are far from certain into their effectiveness and they should not be so quick to accept them,” Mr. Greaney said.

Then again, the Justice Department did not challenge recent high-profile mergers of AT&T Inc. and DirecTV or Expedia Inc. and Orbitz Worldwide Inc.

Federal antitrust regulators could approve both, deny both or approve just one of the health insurer mergers.

“It gets difficult, I would think, for the DOJ to approve one and not the other,” Moody’s Mr. Zaharuk said. “If the DOJ can convince Anthem-Cigna to withdraw their request, then it can go ahead and easily approve the Aetna-Humana deal. If the Anthem deal has to be rejected outright by the DOJ, then I think that’s why we’re hearing some rumors circling that the Aetna deal is in trouble.”

“If one merger is not going to happen … that does change the landscape,” said Martin Gaynor, professor of economics and health policy at Carnegie Mellon University.

If the Justice Department sued to block the mergers, the health insurers are in for months of litigation, said David Balto, a Washington-based antitrust lawyer and former policy director at the Federal Trade Commission.

If a judge ultimately blocked the deals, Anthem would owe Cigna a $1.85 billion breakup fee, and Aetna would owe Humana $1 billion, according to their merger agreements.

“Cigna and Humana come out very strong,” Mr. Zaharuk said. The breakup fee “gives them opportunities to do different things in the marketplace, to expand the businesses and diversify to different products and geographies.”

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.