Anthem’s Bid for Cigna Is Tied to Rival Deals

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By David McLaughlin

July 24 — The fate of Anthem Inc.'s proposed takeover of Cigna Corp. is now linked with that of Aetna Inc.'s bid for Humana Inc., as antitrust enforcement officials vow to scrutinize the industry as a whole amid the frenzy of dealmaking.

The $48.4 billion purchase of Cigna announced on the morning of July 24 would cut the number of major health insurers from five to three, making it challenging for Anthem and its rivals to win clearance from the Justice Department, antitrust experts maintain.

“You'd have a massive reshuffling and increased concentration,” said Diana Moss, president of the American Antitrust Institute in Washington. “It's more bottlenecking of the health-care supply chain, which we worry about already.”

Assistant Attorney General William J. Baer, chief of DOJ's Antitrust Division, has said he will assess the industry as a whole, given the surge of deals, to make sure competition is preserved and the mergers don't lead to higher costs for consumers.

“A trend toward consolidation in the health-care insurance market is something we need to factor in,” Baer said in an interview this month on Bloomberg TV.

The insurers, whose deals total almost $90 billion, including Centene Corp.'s bid for Health Net Inc., face a high hurdle to win clearance from a Justice Department that has challenged mergers in industries with few competitors, such as airlines and mobile phones.

“These mergers must be seriously scrutinized to ensure that consumers and health-care providers are protected from mega-insurer market power abuse,” Sen. Richard Blumenthal (D-Conn.) said in a July 24 statement.

The nation's biggest doctor group weighed in against the mergers July 24, saying they give insurers too much control.

“The lack of a competitive health insurance market allows the few remaining companies to exploit their market power, dictate premium increases and pursue corporate policies that are contrary to patient interests,” the American Medical Association said in a statement.

To help win clearance from authorities, Aetna is trying to distinguish itself from Anthem's takeover by highlighting that its deal is about Medicare Advantage, the privately administered version of the government insurance program for the elderly and disabled, which operates differently than the commercial health-care market.

Complementary Markets 

Anthem-Cigna's Hart-Scott-Rodino review “is manageable and will be successful,” Cigna Chief Executive Officer David Cordani said in an interview. “Beyond the capabilities that are brought together, the geographic overlay is complementary as opposed to redundant in general.”

Health-plan providers are under pressure to get bigger after the Affordable Care Act, enacted in 2010, triggered a race for new customers and imposed tougher rules and limits on the industry's profits. A successful takeover of Cigna would give Anthem more scale in commercial coverage and make it the largest health insurer in the U.S. by members.

The incentives created by health reform to combine and cut costs could offer some leverage to insurers seeking antitrust clearance because they can point to government policy as fueling their deals, according to Professor Brian Quinn of Boston College Law School.

“These are natural economic responses to increased regulation and increased pressure on the businesses to become more efficient,” Quinn stated. “If I was Anthem and Cigna, I'd take the position that you put these policies into place and as a result we have to consolidate.”

The Senate Judiciary Committee's antitrust panel plans to hold a hearing in September on consolidation in the market to examine how deals will affect consumers.

Potential Sales 

The DOJ traditionally examines competition in local markets when reviewing health-insurance deals and requires merging companies to sell business lines in those areas that could result in higher costs.

In 2012, for example, the government required Humana to sell Medicare Advantage plans in 51 counties and parishes in five states to proceed with its takeover of Arcadian Management Services Inc.

The challenge with divestitures is that antitrust officials want to ensure that doctors and hospitals affiliated with the plans being sold are willing to transfer to the new buyer so the network can be recreated.

With two major deals pending at the same time, pulling off asset sales in local markets becomes tougher because there are fewer potential buyers due to consolidation, according to Jennifer Rie, a litigation analyst at Bloomberg Intelligence.

Bigger Risk 

If DOJ changes its approach to insurer reviews and considers a national market for health insurance, that could pose an even bigger risk for the transactions, Rie speculated.

Anthem's and Aetna's takeovers will also reduce possible future competition by eliminating insurers that could move into new geographic areas or product lines, according to Professor Leemore Dafny of Northwestern University, who studies the health-care market. That's another worry for the Antitrust Division, she said.

“You're taking out a potential rival,” said Dafny, a former Federal Trade Commission official.

Then there's antitrust enforcers' sensitivity to skyrocketing health-care costs.

“Health-care markets are so important, and it's been a focus of DOJ and the FTC enforcement activity,” according to Andrea Murino, a practitioner in the Washington office of Goodwin Procter LLP. “It's a key sector that affects every single one of us.”

Richard A. Feinstein, of the Washington office of Boies, Schiller & Flexner LLP, projected that the Antitrust Division “will examine overlaps in local markets—both private and Medicare Advantage—and also whether the deal may reduce competition for marketing health insurance to national employers.”

This proposed merger, he added, “will surely get a close look from [DOJ], particularly with the Aetna/Humana deal already pending.”

Feinstein, who formerly served as director of the FTC's Bureau of Competition from 2009 to 2012, stressed that the DOJ will “scrutinize the efficiencies advanced by the parties in support of the deal and may take into account the possibility that the insurers could have excessive buying power in their dealings with health care providers.”

With assistance from Zachary Tracer and Ed Hammond in New York

To contact the reporter on this story: David McLaughlin in Washington at dmclaughlin9@bloomberg.net

To contact the editor responsible for this story: Sara Forden at sforden@bloomberg.net

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