Will Aetna, Humana merger go through?

After Aetna’s proposed $37 billion acquisition of Humana was announced last year, the Justice Department (DOJ) was quick to raise opposition to the deal, and on July 21, filed an injunction in federal court against the merger. The same day, the DOJ also filed suit against Anthem and its proposed $53 billion purchase of Cigna.

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In bringing the suits, Attorney General Loretta Lynch explained that allowing either merger to go through would leave much of the multi-trillion-dollar health insurance industry in the hands of three mammoth insurance companies and restrict competition in key markets.

U.S. District Judge John Bates scheduled the looming antitrust challenge regarding Aetna and Humana for a December 5 start date with a decision coming in mid-January. The Anthem/Cigna case has yet to get a start date.

Paula Wade, principal analyst at Decision Resources Group, Burlington, Massachusetts who regularly deals with national health plans, notes that Aetna-Humana would be the nation’s largest Medicare Advantage and Part D insurer, controlling the prescription drug access for roughly 9.5 million seniors, and the nation’s largest purchaser of prescription drugs.

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“Because drug pricing deals are tied to volume, the company would be able to drive for lower prices and higher rebates on drugs, and lower physician rates in many markets,” she says. “Similarly, their larger scale would help them drive down costs on everything from stents to hospital rates. The companies argue that this would be good for consumers, but obviously regulators disagree.”

Next: Raising a number of concerns

DOJ officials informed the healthcare companies that their combination would raise a number of antitrust concerns, and expressed skepticism that those problems could be addressed through concessions.

Michael S. Denniston, a partner with Bradley Arant Boult Cummings LLP, a North Birmingham, Alabama, law firm that focuses on healthcare among its offerings, notes the government often will identify a particular market or markets where it believes the transaction is likely to have a substantial impact on competition.   

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“The U.S. Department of Justice’s concerns stem mainly on whether the transaction will limit consumer choices in a particular market, Medicare Advantage health plans for the elderly,” he says. “The typical approach of parties wanting to close on the transaction take is to try to divest assets that would address the government’s concerns.”

That is, before closing, a party sells certain assets to a third party, with the idea that the third party will be an independent competitor that will preserve the competition the government believes will be lost with the main transaction.

The American Medical Association is on record as opposing Aetna’s purchase of Humana as well, estimating that the merger would diminish competition in 58 different metropolitan areas in 14 states: Arizona, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Mississippi, Ohio, Tennessee, Texas, Utah, Wisconsin and West Virginia.

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In response to the Justice Department’s concerns, Aetna and Humana suggested a package of potential divestitures to possible buyers, and drew bids from major insurers.

Next: Was Aetna divesting Medicare Advantage sites?

Rob Fuller, Of Counsel at Nelson Hardiman, LLP, Los Angeles, California, who represents doctors and hospitals, notes a typical remedy would be to scale down the size of the business and have divestiture of certain part of the business. And that’s what Aetna tried to do.

For example, there were reports that Aetna was divesting Medicare Advantage assets over the course of recent weeks.

“Humana and Aetna have said that a major reason for the transaction is the combination of Humana’s Medicare Advantage business and Aetna’s commercial insurance business,” Fuller said. “By Aetna divesting a substantial amount of its existing Medicare Advantage assets, it tried to convince the DOJ that there still would be robust competition in that market after it acquires Humana.”

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Denniston says that if it’s true that Aetna was divesting Medicare Advantage sites in various counties or metropolitan areas across the country, and those assets were being acquired by existing market participants or by new entrants, then that would be a standard approach to preserve competition and let the transaction close. 

In his opinion, there was not much more Aetna could do. 

“They are focused on divestitures in the area in which the government has concerns. It would not be likely to be helpful to divest assets in another sub-market where the government has not expressed concerns,” he says. “There is a tipping point at which additional divestitures take away too much of the value of the transaction to Aetna. At that point, it would have to decide whether to abandon the transaction [incurring a substantial breakup fee to Humana] or litigate its right to close with the DOJ.”

Next: Looking torwards an uncertain future

The DOJ responded that no amount of divestiture could remedy the problem and that the merger would harm consumers and is illegal due to antitrust laws, thus the injunction.

Multiple reports reveal that Aetna has until December 31 to close the Humana acquisition, or it may face paying out $1 billion to Humana in a break-up fee. However, the DOJ claims that the companies could voluntarily extend the option date, if both are still interested in combining operations.