Judge Blocks Aetna’s $37 Billion Deal for Humana

2017-01-23 18:03:09

 

Judge Blocks Aetna’s $37 Billion Deal for Humana

A federal judge ruled on Monday that a $37 billion merger between the health insurance giants Aetna and Humana should not be allowed to go through on antitrust grounds, siding with the Justice Department, which had been seeking to block the deal.

The deal is one of two mega-mergers proposed by the nation’s largest health insurers; both were challenged by the Obama administration. Another federal judge is expected to rule soon on the case involving Anthem and Cigna, the larger of the two deals, at $48 billion.

Citing the sweeping changes to the industry caused by the Affordable Care Act, insurers had embarked on a frenzy of deal making a year and a half ago. The proposed combinations promised to reshape the industry by shrinking the number of the largest insurers to three, from five; the largest, UnitedHealth Group, remained independent.

Today, the industry finds itself in arguably an even greater state of flux, with President Trump and the Republican-controlled Congress having vowed to repeal the Affordable Care Act and replace it with something else, the details of which are unknown. Monday’s decision adds to the uncertainty facing the industry.

While the judge found that a merger of Aetna and Humana would not be in the interest of its consumers, companies are likely to remain interested in future combinations. Insurers view mergers as a way to gain greater clout in negotiations with hospitals and doctors.

An Aetna spokesman said the company was reviewing the opinion and “is giving serious consideration to an appeal.” Humana did not respond to an email seeking comment.

If the deal falls apart, Aetna would have to pay Humana $1 billion, according to the terms of the merger agreement.

The Aetna-Humana combination was largely focused around the private market for Medicare Advantage plans, a fast-growing area in the industry in which companies offer private insurance as an alternative to the federal government’s traditional Medicare program.

Humana, while smaller than its rivals, has a strong position in the Medicare Advantage market and was viewed as an attractive acquisition.

But the deal came under sharp criticism from consumer advocates and government officials who argued that the private market was already concentrated: Individuals would suffer from a lack of choice and competition in certain markets. UnitedHealth, Humana and Aetna were the three largest players in the Medicare Advantage market, according to an analysis by the Kaiser Family Foundation last year.

In his ruling, the judge, John D. Bates of the United States District Court for the District of Columbia, said the court “mostly agrees” with the Justice Department’s argument that the deal would lessen competition for Medicare Advantage plans as well as individual health insurance sold in state marketplaces.

Judge Bates rejected the companies’ rebuttal, saying that government regulation would be unable to prevent the combined entity from “raising prices or reducing benefits.” He said that neither new competitors nor divestitures would be enough to address the concentration that would result from the merger.

The insurers had argued that the merger would allow them to become more efficient, passing those savings on to consumers. But the judge said he did not think the merger would benefit people buying policies, especially in those markets where the combination of the companies would have a large share of the business.

“The court is unpersuaded that the efficiencies generated by the merger will be sufficient to mitigate the anticompetitive effects for consumers in the challenged markets,” he wrote.

Over the last few years, the Obama administration became more aggressive in blocking deals, especially in health care. The government has blocked mergers among large hospital systems and contributed to dismantling the $152 billion deal between Pfizer and Allergan.

Monday’s ruling came six months after the Justice Department sued to block both the Aetna and the Cigna deals. Both were seen as unlikely to succeed, although the merger between Cigna and Anthem was seen as even less likely to be approved because those two companies have more overlap nationally and have been unable to present a unified front.

Judge Amy Berman Jackson, also of the United States District Court for the District of Columbia, has yet to issue a ruling on that combination, although antitrust lawyers said they did not believe Monday’s decision would affect her decision.

“The facts are very different,” said Andrea Murino, a partner and co-chairman of the antitrust and competition law practice at Goodwin. While Judge Jackson is likely to look at her fellow judge’s opinion, “she probably made up her mind long ago,” Ms. Murino said.

The Justice Department, which has not yet had new leadership installed under President Trump, issued a statement applauding the decision.

“This merger would have stifled competition and led to higher prices and lower-quality health insurance,” said Brent C. Snyder, a deputy assistant attorney general in charge of the department’s antitrust division. “Aetna attempted to buy a formidable rival, Humana, instead of competing independently to win customers.”

Analysts played down the ability of Aetna to prevail in any appeal of the decision, and Ms. Murino described any challenge to Judge Bate’s decision as “an uphill battle.”

But Matthew L. Cantor, a partner at Constantine Cannon, said Aetna was most likely trying to buy time in making an appeal to see if the Trump administration might be more amenable to some sort of combination.

“I wouldn’t be surprised if those kinds of discussions are happening,” he said.

Even if both mergers are successfully blocked, analysts predicted there would be continued consolidation as insurers tried other combinations that could make it past the Justice Department and state antitrust officials.

Humana’s Medicare Advantage business is particularly attractive in the current environment, Ana Gupte, an analyst with Leerink Partners, told investors. She mentioned both Cigna and Anthem, which may be looking for merger partners if their deal is blocked, as potentially interested in pursuing Humana.

Antitrust experts echoed the idea that the companies, even if they are unsuccessful in their current attempts to merge, would not stop trying. “I don’t think this rules out further consolidation in insurance markets,” Mr. Cantor, of Constantine Cannon, said.

Shares of Aetna closed down about 2.8 percent while Humana’s shares closed up 2.2 percent. Cigna’s and Anthem’s shares were little changed.

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