THE NEW YORK TIMES
By LESLIE PICKER and REED ABELSON
JULY 19, 2016
The Justice Department is preparing lawsuits to block two giant health insurance deals, according to a person briefed on the matter, continuing a spate of antitrust actions in a whirlwind year for mergers and acquisitions.
Antitrust officials are concerned that Aetna’s $37 billion deal with Humana, and Anthem’s $48 billion pursuit of Cigna, will harm competition in the health insurance industry, said the person, who spoke on condition of anonymity because the suits had not yet been filed. The deals would have decreased the number of the largest insurers to three, from five.
The Justice Department’s final decision is expected this week or next, the person said.
Anthem and Cigna both declined to comment, and Humana did not immediately return a request for comment. A spokesman for Aetna said: “We don’t comment on rumors and speculation, but we are steadfast in our belief that this deal is good for consumers and the health care system as a whole.”
If both deals are withdrawn, 2015 would no longer be the largest year ever for mergers and acquisitions globally, according to Dealogic, a data provider. Instead, 2016 would be on pace to break records for the scope of withdrawn deals, with $723 billion of deals being abandoned so far this year.
Challenges to the health insurance deals would be the latest in a string of suits against what the government perceives to be anticompetitive mergers. Similar concerns caused the breakup of Baker Hughes’s proposed $35 billion combination with a fellow oil-field services company, Halliburton. Antitrust concerns also thwarted the $6.3 billion merger between Staples and Office Depot.
Bloomberg News reported on the expected lawsuits earlier on Tuesday. Shares of all four companies fell in afternoon trading.
If the lack of regulatory approval scuttles their deal, Anthem will need to pay a $1.85 billion breakup fee to Cigna, according to the merger agreement. Aetna will be required to give $1 billion to Humana under those same circumstances, according to a filing. The companies could challenge any Justice Department findings, and the mergers could proceed if the companies can successfully make the case that the deals do not harm competition.
The proposed mergers would greatly reshape the health insurance landscape. The combination of Anthem with Cigna would create a powerful presence in the market to offer insurance administration to large employers. And Aetna’s combination with Humana threatened to further consolidate the market for private Medicare plans.
Of the five largest insurers, only UnitedHealth Group, the most diversified of the national plans, remained out of last year’s merger frenzy.
While the two mergers were aimed at very different types of insurance markets, consumer advocates and others raised concerns that the deals would result in higher insurance prices for consumers. Even if the larger companies were able to drive down the prices they paid for care from hospitals and doctors, critics worried those savings would not flow to the people covered under the plans.
“Prices may go up either way,” said David Friend, managing director at BDO, the consulting firm. “But if they do not block, people can say you created this problem by allowing competition to disappear.”
The companies argued the mergers made sense in the new world created under the Affordable Care Act, in which their profits were limited and their business model shifted more to figuring out how to deliver care less expensively.
Investors have suspected for a while that the Anthem-Cigna deal was in trouble. In May, a series of letters reported on by The Wall Street Journal showed both sides fighting over issues such as Anthem’s lawsuit against Express Scripts over the price of drugs, and Cigna’s tendency to miss deadlines and submit paperwork in the wrong format to the Justice Department during its antitrust review process.
But analysts and others put better odds on Aetna and Humana completing the deal, given the ability of the companies to divest themselves of businesses in areas where the two had too much market share.
While both companies are expected to challenge the Justice Department’s decision, Aetna seems to be the most adamant about fighting the government’s attempt to block the deal.
In a note to investors, Ana Gupte, an analyst with Leerink Partners, described Anthem’s chances of winning as “slim,” while she had more faith in Aetna’s ability to prevail. Aetna and Humana may be able to eventually present a deal that allays antitrust concerns.
“I’m imagining they have a pretty good shot,” she said.
Health care has become a whirlwind of merger activity in recent years as both hospitals and health plans seek to become bigger. Many hospitals have scrambled to combine and to join forces with physician groups, and insurers have bulked up in response, as a way to have greater clout in their negotiations. Many hospital deals are too small to capture regulators’ notice.
The insurance companies have also argued that the Affordable Care Act, which transformed much of their business, has created pressure to merge. In an interview after Aetna announced its proposed merger with Humana, Mark T. Bertolini, Aetna’s chairman and chief executive, argued that companies needed to be able to invest the capital and resources necessary to compete in a rapidly changing environment.
“People who did not invest enough in health care reform and a retail marketplace are going to struggle,” he said.
Many deal makers believe regulators have taken a tougher stance this year. The Obama administration revealed an executive order in April, for example, that encouraged government agencies and policy makers to block mergers that they saw as obstructing competition.
The administration has also been more forceful in thwarting deals conducted purely for tax purposes. In April, the Treasury Department’s new rules on inversions — where American companies acquire foreign ones to attain tax efficiencies — helped to kill Pfizer’s $152 billion merger with Allergan, a fellow drug maker.
The Justice Department’s decision on the health care mergers has a good chance of overlapping with either the Republican or Democratic National Convention, and may result in additional political attention. Some politicians have looked at thwarting so-called mega-mergers as a way to address economic issues such as income inequality and wage growth.
If both health insurance deals fall through, the total amount of transactions would drop to $4.59 trillion, according to Dealogic. That would no longer set a record, but it would still be the highest since 2007.