Aetna-Humana Decision Highlights Weaknesses in Insurance Mergers

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By Matthew Loughran and Liz Crampton

The court order blocking Aetna Inc.’s $37 billion deal to buy rival insurer Humana Inc. highlighted many weaknesses in the proposed mergers of major insurance companies, a number of health-care attorneys told Bloomberg BNA.

The Jan. 23 decision by Judge John D. Bates of the U.S. District Court for the District of Columbia rejected multiple arguments by the insurers touting the benefits of the transaction and the breadth of competition in the market to insure Medicare-eligible individuals ( United States v. Aetna Inc. , 2017 BL 17951, D.D.C., No. 1:16-cv-1494, 1/23/17 ). The court also faulted Aetna for its efforts to pull out of Obamacare marketplaces in Florida, Georgia and Missouri, saying the insurer intentionally left the public exchanges in order to avoid antitrust scrutiny.

“The court ruled for the government on virtually all of its points: The merger is anticompetitive in Medicare Advantage and in individual products sold on the exchanges,” Douglas Ross, an antitrust and health-care attorney for Davis Wright Tremaine in Seattle, told Bloomberg BNA.

Other health-care antitrust attorneys told Bloomberg BNA the breadth of the court’s 158-page opinion didn’t bode well for the chances of an appeal or for any other proposed major mergers, including the $48 billion proposed transaction between Anthem Inc. and Cigna Inc. that is under review by a different judge in the same court.

Chances on Appeal

Nearly all of the health-care antitrust attorneys who spoke to Bloomberg BNA expressed a belief that the court’s opinion would be upheld on appeal.

“Unlike the victories hospitals won against the FTC last year in the two hospital mergers in Pennsylvania and Chicago, this is not likely to be reversed soon or ever,” Ross said.

“This is a belt-and-suspenders opinion. If an appellate court were to quarrel with his reliance on some evidence, he has other evidence to show them that supports the same conclusion,” he added.

J. Mark Waxman, a health-care antitrust attorney with Foley & Lardner LLP in Boston, said any appeal would be an early test of the Trump administration’s priorities. “The court’s discussion and its citations reflect an enormous amount of work and a complex analysis,” he told Bloomberg BNA.

“Given the policy issues and costs of such an effort, we can only wonder whether the new administration will want to continue such efforts as they may affect the plan or provider landscape,” he added.

The fate of the Anthem-Cigna merger is also thrown into doubt by the court’s decision, according to many observers.

“The case continues the unbroken string of mergers in the industry in which courts have rejected an efficiencies argument,” Ross said.

“Significantly, for those looking for clues as to how Anthem-Cigna may be decided, this court was concerned that ‘a significant share of the claimed efficiencies may be retained by the merged firm rather than being passed on to consumers,’ ” he added.

“If the judge blocked this deal, there is very little, if any, chance that the Anthem-Cigna deal gets cleared,” Jason McGorman, a Bloomberg Intelligence analyst, told Bloomberg BNA in an e-mail.

Medicare Advantage Market

The court’s opinion focused largely on the market for Medicare Advantage plans, which provide private insurance coverage for elderly individuals who would otherwise be eligible for federal Medicare coverage. The federal government had argued the merger would eliminate competition between Aetna and Humana in 364 counties in 21 states and would drive up Medicare Advantage premiums.

The insurers, however, said the court should consider seniors who are covered by Medicare as part of the market when evaluating the transaction and not just focus on those who have opted to purchase Medicare Advantage plans. The court disagreed, saying many seniors who purchase Medicare Advantage plans would be unwilling to switch to standard Medicare even if premiums increased.

“The court recognized that original Medicare, along with Medicare supplements, is functionally interchangeable with MA plans, yet it still found MA plans a separate relevant market,” Ross said. “The court relied heavily on merger cases decided in recent years by the D.C. Circuit—the court that will review this result if there is an appeal.”

Jack Rovner of the Health Law Consultancy in Chicago agreed, pointing out the merger obtained some state-level approval based on including Medicare in the product market.

“The Florida Office of Insurance Regulation approved the merger with respect to Florida on finding that original Medicare and Medicare Advantage compete in the same product market,” he told Bloomberg BNA.

“Judge Bates was convinced otherwise by DOJ’s economist and, most telling, by the Aetna and Humana documents,” Rovner, who advises health-care clients on antitrust issues, added.

Rovner said the court’s use of Aetna and Humana documents to rebut their own proposed market definition signaled that potential merger partners “can’t reinvent reality after the fact to try to save their deal.”

Sale of Plans to Molina

In an attempt to settle the government’s antitrust concerns, Aetna and Humana before trial proposed selling several hundred thousand Medicare Advantage plans to smaller rival Molina Healthcare.

Bates was unconvinced that this arrangement would replace competition lost by the merger.

The judge agreed with the Justice Department that Molina lacks experience in offering Medicare Advantage and can’t take on the task of competing in that market. Molina, which draws most of its business from Medicaid, tried to expand into Medicare Advantage several times before but was unsuccessful.

After evaluating the evidence, Bates concluded that the managed care company would “struggle to put together a competitive provider network in the available time frame.”

The decision reinforces that it’s difficult to convince courts to sign off on merger remedies, said David Kully, a former head of the litigation section within DOJ's Antitrust Division.

“Courts are going to scrutinize carefully whether the proposed remedy will restore the loss of competition and aren’t going to accept the assertions of the parties at face value that it will,” said Kully, now a partner at Holland & Knight.

California-based Molina reported 2015 revenues of $14 million compared with Aetna’s $60 billion and Humana’s $54 billion.

The proposed fix was also torpedoed by internal communications among Molina executives presented in court. E-mails exchanged between the board of directors and top executives revealed that company leadership doubted its ability to handle the assets.

“This is a very different business from what we do, including commercial marketing, pricing, contracting, etc,” a Molina board member wrote in an e-mail. “Unless we can acquire some talent as part of the deal, I think we are woefully under-resourced to be able to take this on.”

Bates flagged the “extremely low” purchase price—Molina would have paid $117 million in cash for about 290,000 members—as concern that Molina can be a successful competitor. The Justice Department argued the offer reflected the riskiness of the deal and made Molina more able to abandon plans while still making a profit.

Public Exchange Exit

The court’s opinion also faulted Aetna for bowing out of some public exchanges under Obamacare, saying the insurer did so in an effort to thwart the DOJ’s case against the merger.

Aetna argued it made a business decision to exit the exchange markets, that those plans were losing the company money, but the court didn’t accept that explanation.

Ross noted that the court found Aetna made a litigation decision to exit those markets after having suggested to the government that if it permitted the merger Aetna wouldn’t exit those markets, but that if the government didn’t let the merger through, Aetna would pull out of the individual markets.

“Here’s a tip for practitioners: don’t let your client threaten the government. It doesn’t go over well,” he said.

Market Reactions

If the deal falls through as a result of the court’s decision, Aetna will be on the hook for a $1 billion breakup fee to Humana.

In the two days since the court’s decision was announced, Aetna shares dropped by 4 percent from just over $122 a share to just over $117 per share.

However, Humana’s shares rose by just over 2.5 percent on Jan. 23, the day that the court’s decision was announced, closing at just over $205 a share, up from just over $200 a share. On Jan. 24, the insurer’s stock gave back much of those gains, closing at just under $200 per share.

Credit rating agency Fitch Ratings said it wouldn’t take any immediate action with regard to either company after the court’s decision, instead choosing to wait and see whether the insurers appealed the decision and the result of that appeal.

To contact the reporters on this story: Matthew Loughran in Washington at; Liz Crampton in Washington at

To contact the editors responsible for this story: Peyton M. Sturges at; Tiffany Friesen Milone at

For More Information

The court's opinion is at

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