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Feb 2017

Breaking Up Is Easy To Do…If Court Ordered

There is an irony of Valentine’s Day ringing in a new era in U.S. healthcare, as the federal judicial branch puts a halt to the coupling of major health plans. As a new Executive Administration settles into Washington, the federal judiciary brought the gavel down on the mega-mergers involving Anthem and Cigna, as well as Humana and Health Net.

In early February, a U.S. District Court judge sided with the Justice Department and blocked Indianapolis-based Anthem’s proposed $54 billion acquisition of Bloomfield, Conn.-based Cigna on grounds the combined insurer would harm consumers and impede innovation. The decision was just the latest blow derailing an unprecedented effort to consolidate the country’s health insurance industry. In January, a different federal judge ruled against Aetna’s proposed acquisition of Humana.

With the writing on the wall, Aetna and Humana decided this month to walk away from their $34 billion merger deal on February 14, since their agreement was set to expire on February 15. The Valentine’s Day annulment comes with a financial hit. Aetna will pay Humana a $1 billion breakup fee or $630 million after taxes. Aetna also terminated its plan to sell some Medicare Advantage assets to Molina Healthcare.

With the Affordable Care Act under attack during a contested presidential election, the U.S. Justice Department sued in July to halt Anthem’s purchase of Cigna. If the merger went forward, it would mark a deal that would have created the largest U.S. health insurer by membership. Dancing in the background was Aetna’s planned $33 billion acquisition of Humana.

Judge Amy Berman Jackson of the U.S. District Court for the District of Columbia said the proposed merger would worsen an already highly-concentrated market and would likely raise prices if Anthem’s deal were allowed. Government anti-trust officials argued both health plan deals would lead to less competition and higher prices for Americans. The acquisitions would have reduced the number of large national U.S. insurers from five to three. Suddenly, the leverage would be entirely with the commercial plans. In an era of rising premiums and deductibles, the judges took enough economics to know more healthcare options would be better than less.

Justice Jackson separated the Justice Department’s case into two trials. Her ruling focused only on the first one in which the Justice Department argued the plan marriage would severely hurt the ability of large, national employers to get competitive rates for the health coverage they were mandated by the ACA to provide employees.

The second trial considered overlaps in the two health plans’ business selling health benefits to individuals and administering Medicare Advantage coverage to the elderly. Anthem argued there was enough competition in the market place, citing large companies with more than 5,000 employees often used multiple smaller players in the national market. Justice Jackson disagreed.

Cigna stated it intends to carefully review the court’s opinion and evaluate its options in accordance with the merger agreement. An Anthem spokeswoman declined to comment on the matter.

Standing on the sidelines during the dance was the fifth player, UnitedHealth. The Minnesota-based health plan was not involved in any of the deals. Wall Street analysts expect all four of the companies to now move on to business as usual.

What caused the merger-mania? The health insurers blamed new costs, from higher taxes to investments in new Obamacare products, for driving their need to couple up with a rival. That post 2016-election landscape is less certain now. Aetna and Humana have cut back Obamacare enrollment for 2017 after financial losses. Complicating the forecast is President Donald Trump and the Republican-controlled Congress weighing a “repeal and replace” path for the Affordable Care Act.

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