A federal judge said Aetna worsened its chances for closing its $37 billion merger with Humana when it pulled out of several Affordable Care Act insurance exchanges. Aetna had said it was due to financial losses.
U.S. District Judge John Bates Monday blocked the $37 billion tie-up. According to his opinion, Aetna leadership made good on repeated threats to the U.S. Justice Department and then-HHS Secretary Sylvia Mathews Burwell to curtail its participation in the exchanges if the merger were blocked.
This strategy, depicted in transcripts of phone calls, emails, depositions and internal documents throughout the opinion, not only worsened Aetna's chances of closing the merger, but also jeopardized the ACA exchanges.
Aetna's retreat from the exchanges was and still is “a big deal,” said Craig Garthwaite, a health economist at Northwestern University. Not only did its exit reduce competition and choice for consumers in certain exchange markets, but it gave an “impression to people that the marketplaces are failing” and “that's totally inaccurate,” he said.
Aetna chose not to comment on this story.
Aetna announced it would drastically scale back its 2017 participation on the individual insurance markets in August 2016, a month after the Justice Department filed a lawsuit to block the Humana merger. Aetna pulled out of exchanges in 11 states, forcing hundreds of thousands of plan members to find a new insurer. It remained in just four states.
The retreat was unexpected at the time, since Aetna just months before seemed optimistic about the future of the marketplaces. Aetna Chairman and CEO Mark Bertolini even told investment analysts in April that the insurer was on track to break even on the exchanges in 2016.
Aetna's tune changed after releasing its second-quarter earnings for 2016. The Hartford, Conn.-based insurer announced it would pull out of the marketplaces in light of financial losses from the exchange plans totaling $200 million. Aetna has since said it expects to incur a pre-tax loss of $350 million from exchange plans for 2016.
Citing their own financial losses, UnitedHealth Group and Humana had announced earlier in the year that they too would scale back their participation in the exchanges, as had other smaller insurers. More than a dozen health co-ops had also failed.
But Aetna's decision was puzzling, Garthwaite said. It made more sense that UnitedHealth would pull out, because it was offering broader networks on the exchanges that could open it up to higher costs, and it didn't have much experience insuring the largely low-income people who enrolled in exchange plans. UnitedHealth was also hesitant about the exchanges from the start. But Aetna had more experience insuring a low-income population, and it employed narrower networks, Garthwaite said.
In the court opinion, Bates concluded that Aetna's decision to exit certain exchange markets was made to improve its litigation position and not because of business reasons.
Aetna first used its participation in the exchanges as leverage when dealing with the Justice Department, court documents show. In one instance, Aetna Executive Vice President Steven Kelmar told Burwell that Aetna “would likely have to revisit its plans for and presence on the public exchanges” if the merger were blocked. Kelmar also later sent Bertolini “talking points” that promised Aetna would remain committed to the ACA exchanges if the deal closed. But if the merger were blocked, the $1 billion break-up fee required of Aetna would impact the insurers' business and have tough consequences for the market.
Bertolini told Burwell over the phone in June that were she to be contacted by the Justice Department regarding the merger, he would “appreciate a good word for all that we've done with you,” according to the opinion. Bertolini's discussions become more specific in July, when he wrote a letter to the Justice Department stating he would immediately reduce Aetna's exchange footprint in 2017 and withdraw from at least five different states, or possibly the public exchange business altogether, if the Justice Department sought to block the deal, court documents show.
When the Justice Department filed a lawsuit to halt the merger, Bertolini complained in a letter to Ron Williams, the former CEO of Aetna, that “the administration has a very short memory, absolutely no loyalty and a very thin skin,” the opinion showed.
The Justice Department's complaint against the merger said it would harm people in 17 counties in Florida, Georgia and Missouri where Aetna and Humana competed on the exchanges. Court documents show that Aetna leadership began contemplating an exit from those counties soon after. They then tried to “conceal from discovery in this litigation the reasoning behind their recommendation to withdraw from the 17 complaint counties,” Bates wrote. For instance, Aetna's head of the national exchange business warned against putting any of the team's discussions in writing, according to court documents.
Bates also said Aetna's leadership did not evaluate the profitability of the individual business in those counties before deciding to withdraw as it had for other markets it planned to exit, Bates wrote. In fact, Florida was projected to be profitable in 2017, but Aetna pulled out anyway.
“The inescapable conclusion from these contemporaneous emails and documents is that the Aetna team making recommendations to Bertolini did not view withdrawing from the 17 complaint counties as a business decision,” the opinion stated.
Bates determined that Aetna is likely to return at some point after this year to some of the markets it left, so he evaluated those markets for anticompetitive effects. He found that the merger would substantially reduce competition in three Florida counties.
Some statements in the opinion shed light on how Bates' viewed what he saw as Aetna's strategy to dodge judicial scrutiny. He wrote that courts shouldn't allow a company to “thwart judicial review through its own machinations,” and that doing so would “create incentives for firms to take similar actions in the future to evade antitrust review.”
While Bates' decision ultimately rested on the potential merger effects in the Medicare Advantage market, the maneuvering hurt Aetna's case, experts said.
“Judge Bates viewed that decision as gamesmanship, and it likely cast a pall over many of the arguments that Aetna chose to proffer,” said Andrea Murino, partner and co-chair of the antitrust group at law firm Goodwin Procter.
Most importantly, Aetna's exit damaged the state of the exchanges. While it wasn't the only insurer that announced plans to exit certain marketplaces in 2017, its withdrawal reduced options for consumers.
Just 167 insurers are selling coverage through the exchanges this year, down from 232 in 2016, according to HHS data. Across the 39 states using the federal exchange, 15 insurers entered the market for 2017, while 83 insurers stopped offering exchange coverage. Aetna accounted for a large chunk of those exits.
According to the Kaiser Family Foundation, 1,021 U.S. counties have just one insurer selling coverage this year, compared to 225 in 2016. Because other smaller insurers may have exited exchanges around the same time as Aetna, it's difficult to say which of these counties, if any, was left with a sole insurer because of Aetna's retreat, said Cynthia Cox, an associate director at the Kaiser Family Foundation who studies the ACA's exchange markets.
Of the 17 counties in Florida, Georgia and Missouri that Aetna exited, just one was left with a single insurer this year, though five counties have just two insurers, Kaiser data showed. Multiple insurers are necessary to create competition and hold down costs.
Public perception of the health of the exchanges, though, may have been most affected. Aetna's exit “raised alarm bells” and made it feel like the marketplaces were “in imminent danger,” Cox said. Aetna, with 23.1 million members, is one of the country's largest insurers.
Would-be consumers on the fence about enrolling in exchange coverage may have decided against it after hearing that Aetna, along with both UnitedHealth and Humana, were calling it quits, Garthwaite said. That's especially troubling since the exchange have been struggling to enroll enough people to stabilize the risk pool and reduce premiums, he said.
The exchanges have been plagued by low enrollment, and those that have signed up tend to be older and sicker, making them more expensive to insure.