Federal judge blocks $54-billion Anthem, Cigna merger; judiciary giving notice who’s boss in court

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The News:

A federal judge last week (February 6, 2017) blocked health insurer Anthem Inc. (Indianapolis IN) from acquiring rival Cigna Corp. (Bloomfield CT), the second court ruling in recent weeks to deal a decisive reproach to efforts to reshape the industry through megamergers.

A federal judge blocked health insurer @AnthemInc from acquiring rival @Cigna Click To Tweet

According to MorningStar.com, the decision, by US District Judge Amy Berman Jackson, said the proposed $48 billion deal violated federal antitrust law because it would create an unacceptable reduction in the number of companies that can serve large national employers that insure their workers.

The ruling echoed a decision by a different judge last month who blocked Aetna Inc.’s (Hartford CT) plans to take over Humana Inc. (Louisville KY). Although the two proposed insurer combinations were distinctive in many ways, the message from the courts was similar: Judges found that merging top industry rivals threatened higher prices and less service, with the benefits of those deals failing to outweigh the potential harms.

While Aetna is considering a possible appeal in its case, last week’s ruling almost certainly demolishes the Anthem-Cigna transaction, as dissension between the companies has grown considerably since they announced their deal in July 2015.

At the deal’s inception, the insurers said their union would create a diversified, innovative and more efficient health insurer. But the two sides’ relationship soured over time as they clashed over leadership styles and visions for the future. The companies quarreled during the Justice Department’s review of the transaction and eventually accused each other of violating the merger agreement.

Aetna closed the week off 1% at $121.69. Cigna slid 3% to $145.55. The case is US v. Anthem Inc., 16-cv-1493, US District Court, District of Columbia (Washington). (pdf)

Steve’s Take:

Flexing its sovereign constitutional authority, the US judicial branch last week in one instance told the Trump administration to take its executive order barring immigration from seven Muslim-majority nations and…..

In another, a federal judge blocked health insurer Anthem from acquiring rival Cigna, the second court ruling in recent weeks to deal a decisive blow to health insurers seeking consolidation by arguing they constituted a cure to the substantially higher operating costs plaguing the industry as a result of Obamacare.

According to Bloomberg, the latest ruling by US District Court Judge Amy Berman Jackson was, in effect, a carbon copy of a decision by a different judge last month who blocked Aetna’s plans to take over Humana.

Following the latest announcement, Anthem is on the hook to pay Cigna a $1.85 billion breakup fee. The fee, which was determined before the Justice Department’s decision to take issue with a combination, will presumably compensate Cigna for the risk it took an agreement to merge with anthem.

Both decisions to block the two tie-ups were predicated on the notion that they would limit competition in the group health-insurance market. Anthem’s argument that combining with Cigna would give it the scale to bid down prices for employers and their employees received no love whatsoever, with Judge Jackson determining such advantage:

“wasn’t significant enough to offset the risk of reduced competition.”

The question now is what the various companies will do with the large piles of cash they allocated for the acquisitions, and whether they will renew their combination efforts under a Trump administration, whose antitrust officials could be more amenable to large consolidations. They could also pursue smaller approaches to reap the cost benefits (and market dominance) they are seeking in the face of widespread uncertainty about the future of the US health system.

On the other hand, they may first go back to court.

“Anthem is significantly disappointed by the decision,” CEO Joseph Swedish said in a statement, according to Bloomberg. “If not overturned, the consequences of the decision are far-reaching and will hurt American consumers.”

Cigna was more contemplative, saying it:

“intends to carefully review the opinion and evaluate its options in accordance with the merger agreement.”

CEO David Cordani has guesstimated that his company will have $7 billion-$14 billion of available capital, with the high-end including extra debt the company could take on if it decided to make acquisitions.

“We have a track record of being very disciplined relative to our capital priorities and not allowing surplus capital to sit around,” Cordani said on January 11.

Looking ahead, although the two proposed insurer combinations were different in many ways, both judges found that merging top industry rivals threatened higher prices without the necessary patient benefits to offset those higher costs.

According to the Wall Street Journal, the decision by Judge Jackson said the proposed $48 billion Anthem-Cigna combination:

“violated federal antitrust law because it would create an unacceptable reduction in the number of companies that can serve large national employers that insure their workers.”

While Aetna says it’s considering a possible appeal of its case, last week’s ruling almost certainly obliterates the Anthem-Cigna transaction, as the two companies have been squabbling since they announce their deal and July 2015.

Anthem already has said it would pursue other deals and buy backs as it “Plan B” if the Cigna transaction didn’t go through. CEO Swedish has said he might attempt to expand in the Medicare advantage market through acquisitions, for example.

The 18-month effort to get the transaction accomplished was punctuated by discord between Anthem and Cigna. Last year, the companies accused each other of violating the merger agreement, and the government said in court that disputes among executives undercuts the rationale for a deal.

Such hostility could escalate even further with the deal killed at this juncture and Cigna owed a $1.85 billion breakup fee. Anthem wouldn’t have to pay the fee if it could prove Cigna committed a “willful breach” of the merger agreement. Not an easy task to be sure.

Last summer, several of the biggest health insurers pulled out of Obamacare exchanges after losing hundreds of millions of dollars serving unprofitable markets in 2016, ZeroHedge points out. Aetna even warned the failure to close proposed mega-mergers in the industry would only result in further withdrawals and less customer options.

It’s possible that Anthem will go forward with an appeal. That would put the case in the hands of a three-judge federal panel, like the one in the 9th Circuit that KO’d President Trump’s immigration ban. My sense is that the district courts’ rulings possesses ample, solid findings and reasoning vis-à-vis federal antitrust law to be upheld at the appellate level.

So where do investors turn for a better plan to capitalize on all this turmoil in the insurance market?

I agree with those who suggest a better plan would be focusing on which of the major companies are most likely to succeed on a standalone basis. Imagine that! In such a scenario, Humana appears to be the most attractive investment prospect because it’s the purest play on Medicare Advantage plans. That’s its edge at the moment.

As pointed out by Motley Fool, there are 76 million aging baby boomers, and increasingly they are turning away from traditional Part A and Part B coverage to Medicare Advantage plans to provide caps to patient out-of-pocket costs, and that benefit often includes drug coverage. Among all these companies, Humana derives the largest proportion of it sales and profit from selling these Medicare Advantage plans.

Steve's Take: Forget #megamergers, investors should focus on companies catering to aging #Boomers Click To Tweet

It seems clear that court decisions to prevent most large insurers from combining will stand up under scrutiny, and investors should therefore focus on companies that emphasize the large (and growing), longer-living population. If that happens, the best investment returns most likely will come not from potential mergers but rather from new products that are a hit among seniors.