Aetna's antitrust defeat may signal the end of health insurance mega-mergers

The consolidation among the biggest health insurance players that seemed so inevitable not long ago may fizzle into a series of smaller deals aimed at growing market share in Medicare and Medicaid plans.

Aetna's $37 billion play for Humana, announced 19 months ago, appeared to be on its deathbed last week. A federal judge issued an order blocking the transaction, agreeing with the U.S. Justice Department's arguments that allowing it to happen would harm consumers in the Medicare Advantage and individual insurance markets.

While the companies may appeal the decision, industry analysts were dubious of their chances. A different judge as of last week had yet to rule on government's case against a merger of two of the other “big five” insurers, Anthem and Cigna. But that deal faced even greater odds from the start because the companies compete head to head for national accounts with big employers.

If these mega-mergers do fall apart, the companies will still be looking for partners, and they'll have money to spend. “All four of these companies are too big now to meet Wall Street expectations through organic growth,” said John Gorman, a former federal healthcare official who is now a consultant in Washington. “They have to acquire.”

But the opinion delivered last week in the Aetna-Humana case will complicate any union of companies with significant assets in Medicare Advantage, the program that allows beneficiaries to choose private managed-care plans in lieu of traditional Medicare.

And choosing partners could prove difficult under a new administration and Congress poised to disrupt every segment of the health insurance industry. Very few things in health insurance seem like a safe bet anymore.

The combination of Aetna and Humana would create the largest Medicare Advantage insurer in the nation. The companies also compete for business with individual plans sold on the Affordable Care Act's exchanges, although both companies pulled out of many of the marketplaces in the months since agreeing to merge. (In fact, the judge in the antitrust trial concluded Aetna pulled out of exchanges to follow through on its threat that it wouldn't be able to maintain its participation if the Obama administration blocked the deal.)

Aetna and Humana claimed combining the companies would lead to lower prices and better benefits for seniors. The Justice Department challenged the transaction in July 2016, arguing it would allow them raise premiums and reduce benefits and would stifle innovation. The court battle lasted 13 days and wrapped up at the end of December.

U.S. District Judge John D. Bates decided that any efficiencies achieved were unlikely to outweigh the damage. He also said the insurers neglected to prove that any savings reaped through the merger would reach health plan members. Attorneys and antitrust experts said Bates' 158-page opinion was thorough and grounded in facts, giving the insurers little chance of winning on appeal.

The decision, assuming it's upheld, established an important precedent by settling a question that had yet to be decided in court: Do Advantage plans compete for customers with traditional fee-for-service Medicare?

Bates concluded that the answer is no, so allowing the merger to go forward would harm competition among Advantage plans in 364 counties. The standard will make it nearly impossible for large Medicare Advantage carriers to combine since the business is already dominated by four major players.

It's a “significant setback to the industry from a consolidation perspective,” Barclays analyst Joshua Raskin wrote in a research note.

That doesn't mean no two insurers that operate in Advantage would be allowed to merge, said Martin Gaynor, a health economist at Carnegie Mellon University. Antitrust decisions are based on facts specific to each case. But it does mean “they would be facing a very tough time,” Gaynor said. “This case draws a line in the sand on that.”

For example, Humana, which serves 3.2 million Medicare Advantage members, and Aetna with its 1.4 million Medicare Advantage members, would face serious obstacles if either wanted to join up with UnitedHealth, the largest insurer in the space with nearly 4 million Advantage customers as of December. (UnitedHealth previously offered to acquire Aetna according to disclosures Aetna filed related to the Humana deal.)

The companies do have other options. Aetna, Humana, Anthem and Cigna might be fine on their own if both deals are ultimately blocked. In particular, Aetna and Humana “were both strong independent operators before this proposed deal, and they will continue to be strong operators if this deal never goes through,” said Jeffrey Loo, an equities analyst at Standard & Poor's Global Market Intelligence.

They are both sitting on cash ready to be spent. If the deals fall through, Aetna will owe Humana a $1 billion breakup fee and Anthem will owe Cigna $1.85 billion, which can be used to fund other acquisitions or investments.

In November, Cigna CEO David Cordani told investors that the Bloomfield, Conn.-based insurer would have between $7 billion and $14 billion in deployable capital in the second half of 2017, including about $5 billion in liquid cash, to potentially be used to expand through other mergers and acquisitions.

Indianapolis-based Anthem also told investors in November that it expects to “resume capital deployment activity in 2017,” though the timing would depend on what happens with the Cigna deal.

Hartford, Conn.-based Aetna has said it has a “plan B” but kept details close to the vest. Investment firm Barclays estimates that Humana will have $4.7 billion in capital ready for deployment, while Aetna will have $4.3 billion.

Anthem or Cigna could make a go at buying Louisville, Ky.-based Humana.

They'd “both like to expand their Medicare Advantage exposure,” which is the best place to be in the new political reality, said Ana Gupte, analyst at Leerink Partners. Many GOP lawmakers favor turning Medicare into a premium-support system, which would push more Medicare members into private plans. Cigna already made overtures for Humana before getting elbowed out of the picture by Aetna.

These potential combinations have less overlap in Medicare Advantage, making it more feasible they could pass muster. Both scenarios, though, would require the companies to unload some Advantage assets to win clearance.

A more likely scenario, however, is a wave of deals in Medicaid.

Medicaid managed-care insurers Centene Corp., Molina Healthcare and WellCare are “the prettiest girls at the dance right now” in terms of possible targets, Gorman said. Aetna has a weak Medicaid presence and might make a play for one of those companies, according to Gupte.

But even though states have moved rapidly toward paying managed-care companies to administer Medicaid benefits, that business is suddenly uncertain as President Donald Trump and congressional Republican leaders push to convert Medicaid into a block-grant system, a model that health policy experts say would likely lead to funding cuts.

Companies that traditionally have done more business in Medicaid, meanwhile, are expanding into Medicare Advantage, such as Centene with its Health Net acquisition and WellCare with its Universal American deal.

Another plausible scenario is that insurers will take the capital to build a healthcare services unit like UnitedHealth's Optum, S&P's Loo said. Optum is the most profitable unit of UnitedHealth and helps to diversify the insurer's revenue through its pharmacy benefit manager and ambulatory-care providers. Express Scripts and CVS Health, Gupte says, could potentially pair up with Humana.

Deals struck in the coming months will take place under the new administration that's expected to be more permissive on antitrust matters than the Obama administration. In fact, then-President-elect Trump earlier this month met with the CEOs of Monsanto and Bayer to discuss their proposed $66 billion deal to form an agribusiness giant. Shortly after, White House Press Secretary Sean Spicer said the combined company would create thousands of new jobs. Trump himself also tweeted support.

The situation raised alarm bells for antitrust experts who say the Justice Department's decisions should remain independent from the White House. Trump's willingness to get involved in corporate dealmaking and his emphasis on deregulation may give hope to health insurers looking for their next deal.