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The U.S. Justice Department's strong objections to merging Anthem Inc. with Cigna Corp. and Aetna Inc. with Humana Inc., outlined in federal litigation filed last month, have left significant doubt about either deal being completed.
Many analysts hold that the $37 billion Aetna-Humana tie-up has a stronger chance of winning approval than the $54 billion Anthem-Cigna union.
“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 research report.
However, Stephen Zaharuk, New York-based senior vice president at Moody's Investors Service Inc., said “the deck seems to be stacked against” the Anthem-Cigna combination.
“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 Justice Department, Leerink Partners L.L.C. Managing Director and Analyst Ana Gupte said in a research note after the Justice Department litigation.
In lawsuits filed July 21 in U.S. District Court for the District of Columbia, the Justice Department objected to the potential deals on anticompetitive grounds and suggested that there were no circumstances in which it would change its mind.
If allowed, the mergers that are “unprecedented in their scope and in their scale” would likely “threaten to increase insurance premiums, to reduce benefits, to lower the quality of health care and to slow innovation,” Principal Deputy Associate Attorney General William Baer said during a news conference about the litigation.
Aetna, Humana and Anthem quickly responded to the Justice Department's decision with vows to fight (see related story), each arguing that the mergers would benefit consumers and not harm competition.
Cigna, on the other hand, seemed less enthusiastic in its initial response, stating that it would evaluate its options and that it expected the transaction to close in 2017, “if at all.”
On Friday, however, Cigna President and CEO David Cordani attempted to dispel concerns about the insurer's commitment, saying it is “fully engaged” in the merger process with Anthem. He also said that in case the merger is blocked, Cigna will have significant capital to seek growth opportunities elsewhere.
As of late last Friday, Anthem was the only insurer to file a response to the Justice Department's litigation. Anthem also has asked for a speedy antitrust trial, though government attorneys late last week urged the court not to rush the complex case. Aetna and Humana also motioned for an expedited trial due to merger agreement deadlines, according to court documents.
The Justice Department's objections to the Aetna-Humana combination center largely on reduced competition in the Medicare Advantage market that would result from the merger. Humana, the second-largest Medicare Advantage provider by covered members, competes with Aetna, the fourth-largest, in nearly 90% of the counties where Aetna offers Medicare Advantage.
The Justice Department holds that Medicare Advantage does not compete with traditional Medicare. Aetna and Humana disagree.
Barclays analysts said in a research note after the Justice Department suit that the federal agency did not make a compelling argument why the two markets don't compete, adding that both cater to seniors and offer the same base benefits.
However, the fact that seniors have the choice between the two products “doesn't mean they are substitutes,” said Thomas Greaney, an antitrust expert formerly with the Justice Department's antitrust division who now is co-director of the Center for Health Law Studies at St. Louis University School of Law.
Medicare Advantage has distinct characteristics, such as greater benefits, lower premiums and a cap on annual out-of-pocket costs, according to the Justice Department's lawsuit.
At the heart of the Justice Department's objections to the Anthem-Cigna union is reduced competition for health insurance and administrative services in the national and local employer markets.
The Justice Department also argues that eliminating Cigna as a competitor to Anthem would reduce innovation in moving toward value-based care in the health insurance industry — a major movement today to reduce health care costs.
“That's been a factor in some antitrust merger cases, the fact that one company that's merging ... is a maverick,” Mr. Greaney said. In that case, “you're losing the one that puts price and innovation pressure on the others.”
The Justice Department also argued that the mergers would harm competition that holds down prices on public health insurance exchanges, and Mr. Baer said divestitures proposed until that point were “incomplete and impractical” and unlikely to solve any antitrust concerns.
Aetna Chairman and CEO Mark Bertolini countered during a CNBC interview July 21 that Aetna has provided “two separate bidders with complete bids, signable contracts that would buy the whole business from us” in each of the problem markets the Justice Department pinpointed.
Even so, sources said post-merger divestitures often fail to restore competition.
Decided in the courts
Ultimately, it's not the Justice Department's call whether the five largest national health insurers become three, with UnitedHealth Group Inc. being the largest and not involved in the mergers, said Andrea Murino, a Washington-based partner and co-chair of the antitrust group at Goodwin Procter L.L.P.
It's unclear how U.S. District Court Judge John D. Bates, who has been assigned to the cases, will rule.
However, federal antitrust enforcers have “been on a hot streak” of winning antitrust cases lately, Ms. Murino said.
In the past two years, several large companies have abandoned merger plans after the Justice Department filed suit. They include Halliburton Co. and Baker Hughes Inc., General Electric Co. and AB Electrolux, and National CineMedia Inc. and Screenvision L.L.C.
Still, federal courts ruled against the Federal Trade Commission twice this year in cases brought against hospital mergers in Chicago and Pennsylvania. The FTC has appealed both.
There's also political tension in merger cases, Ms. Murino said. Antitrust law appears to be at odds with the Affordable Care Act, which seems to encourage consolidation and collaboration in the health care sector, she said.
“The DOJ will tell you that — and the FTC would say this, too — that there's no tension between the ACA and the antitrust laws, but I bet if you asked (the health insurers') lawyers, they would say there very much is,” Ms. Murino said.
Litigation could take months, and the losing party could appeal the decision, Mr. Greaney said.
Observers say the outcome of the litigation may not be known until next year.
If the deals are blocked, Anthem would owe Cigna a $1.85 billion breakup fee and Aetna would owe Humana a $1 billion breakup fee, according to their merger agreements.
Anthem and Aetna have the cash to pay those fees, sources say, and the fees would give Cigna and Humana opportunities to expand, Mr. Zaharuk said.
The insurers could turn their sights to “less transformational” deals with smaller health insurers, as they've done in the past, said Mark Rouck, Chicago-based senior director with Fitch Ratings Inc.
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.