What Missouri's thumbs-down means for big insurance deals

The health insurance mega-mergers proposed nearly a year ago may be entering their final months of regulatory review and the road ahead could be rough.

Last week, Missouri threatened to bar Aetna and Humana from selling health insurance in the state if their transaction is approved unless the companies alleviate competitive concerns. Some observers view the order as a routine starting point for negotiating divestitures and other concessions, but others say it shows the U.S. Justice Department and other states are going to look hard at how the deals would affect consumer and Medicare Advantage markets.

The bad news out of Missouri came days after the Wall Street Journal reported that senior Anthem and Cigna Corp. officials have been sniping at each other about data submissions to regulators reviewing their pending deal. Anthem CEO Joseph Swedish told the newspaper the companies have resolved their differences—which he described as “dynamic tension.”

Missouri is the first state to find serious antitrust problems with either of the deals, and Aetna says it has secured 15 of the 20 state approvals needed to close the deal.

“We are disappointed with the Missouri order but expect to have a constructive dialogue with the state to address their concerns,” Aetna said in a statement. CEO Mark Bertolini said last month that the companies “remain on track to close in the second half of 2016.”

Under the Missouri order, Aetna and Humana have 30 days to “submit a plan to remedy the anti-competitive impact of the acquisition.” But federal regulators and some antitrust experts have increasingly viewed divestitures as an inadequate way to solve antitrust concerns.

“The history of divestitures curing antitrust problems is a very shady history, and that's especially true for insurance companies,” said Barak Richman, an antitrust law professor at Duke University. “These are not individual products that are just manufactured at factories. These are networks and contracts and coordinated relationships that are very difficult for another company to take over.”

John Huff, director of the Missouri Department of Insurance, wrote that if Aetna's $37 billion takeover of Humana goes through, the combined company could no longer sell individual, small group and employer-based Medicare Advantage plans in the state, and their individual Medicare Advantage plans would be kicked out of certain Missouri counties.

Missouri officials were most worried that competition in Medicare Advantage—Humana's primary business and the key reason why Aetna struck the deal—would be stifled and therefore create higher premiums for seniors.

Enrollees in the privately run Medicare plans enjoy lower cost-sharing than in traditional Medicare, but they also have access to fewer hospitals and doctors. The big investor-owned carriers dominate the business. Aetna would become the largest Medicare Advantage insurer if the deal goes through, covering about 4.5 million members before any divestitures.

Aetna executives argue that the company would still cover only 8% of all Medicare beneficiaries and that Advantage plans have to compete with traditional Medicare for beneficiaries during the annual enrollment period.

Insurance regulators in Florida, a state with a significant number of seniors in Medicare Advantage plans, accepted that premise in February. But Missouri officials did not, saying the private Medicare plans compete against one another—not the federal government.

Ira Gorsky, an analyst with institutional broker Elevation, has estimated Aetna would have to divest almost 46,000 Medicare Advantage lives to preserve competition in Missouri. The companies will likely work with Missouri regulators to find an acceptable number, based on county-by-county data. Aetna, through its Coventry Health Care subsidiary, and Humana cover more than 125,000 Missourians in their Medicare plans.

“This order signals the Justice Department will closely scrutinize how the merger of Aetna and Humana will impact Medicare Advantage markets throughout the country,” said Matthew Cantor, an antitrust attorney at Constantine Cannon.

David Balto, a former Justice Department official who is leading a group that opposes both of the big insurance deals, said the DOJ and other states should follow Missouri's lead. Hospitals and physicians, according to a Stat News report, are quietly funding the group, called the Coalition to Protect Patient Choice. “Missouri's decision provides a concrete roadmap about how consumers will lose if these mergers are approved,” Balto said.