Aetna-Humana takeover blocked; mega-merger mania flies out the window, though smaller deals beckon

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The News:

The proposed combination of health insurers Aetna and Humana has been stopped by a federal judge.

Proposed combination of health insurers @Aetna and @Humana has been stopped by a federal judge Click To Tweet

The deal, in which Aetna proposed to buy Humana for $37 billion, has been ruled anticompetitive by US District Judge John Bates.

“In this case, the government alleged that the merger of Aetna and Humana would be likely to substantially lessen competition in markets for individual Medicare Advantage plans and health insurance sold on the public exchanges,” Bates’ decision said.

“After a 13-day trial, and based on careful consideration of the law, evidence, and arguments, the Court mostly agrees.”

Bates also said the companies’ arguments that the merger would not have a negative impact on Medicare Advantage patients was “unpersuasive,” saying regulators would not be able to prevent a combined company from raising prices on consumers. Aetna now owes Humana a $1 billion breakup fee, according to Bloomberg.

“We’re reviewing the opinion now and giving serious consideration to an appeal after putting forward a compelling case,” TJ Crawford, a spokesperson for Aetna, told Business Insider.

Last summer, Aetna threatened to exit the public health-insurance exchanges established by the Affordable Care Act, after the Department of Justice filed a lawsuit to block the merger. In July, Aetna responded to a letter from the DOJ that asked what would happen to the company’s ACA program if the deal were to be denied.

“Finally, based on our analysis to date, we believe it is very likely that we would need to leave the public exchange business entirely and plan for additional business efficiencies should our deal ultimately be blocked,” Aetna CEO Mark Bertolini responded at the time.

This may be an entirely immaterial point Bertolini makes given the determination of the Republican-controlled government to repeal the ACA. Reuters last week reported—without naming a source–that another pending healthcare combination, the Anthem-Cigna megamerger, would be blocked by a federal judge.

Former Attorney General Loretta Lynch argued in July when the suit was brought that both the Anthem-Cigna merger and the Aetna-Humana merger would thwart consumer choice and increase prices, saying:

“not only would the bank accounts of the American people suffer, but the American people themselves.”

Aetna’s stock closed Tuesday down 4% at $117.61, while Humana slipped 1% to $199.94.

Steve’s Take:

So much for titanic M&A in the health-insurance space. The separate mega-mergers of Humana and Cigna are crashing back to earth after a District Court judge blocked Humana’s proposed takeover of Aetna, saying the deal would thwart competition. Ouch!

That decision is an ominous sign for Anthem’s $50-billion offer for Cigna which many analysts say faces even greater odds. The thumbs-down was hardly a surprise, and many of us believe non-titanic deals are legally far more feasible.

Keep in mind that over the last few years, the Obama administration became more aggressive in blocking deals, especially in health care. For example, the government has blocked mergers among large hospital systems and contributed to scuttling the $152 billion deal between Pfizer and Allergan.  And the Department of Justice, which has not yet had new leadership inducted under President Trump, issued a statement applauding the decision.

Brent C. Snyder, a deputy assistant attorney general in charge of the DOJ’s antitrust division, said,

“This merger would have stifled competition and led to higher prices and lower-quality health insurance.” He added, “Aetna attempted to buy a formidable rival, Humana, instead of competing independently to win customers.”

Emboldened by the far-reaching transformation of the industry brought about by the Affordable Care Act, insurers set sail on a whirl of deal making a year and a half ago, notes The New York Times.

The proposed combinations promised to restructure the industry by reducing the number of the largest insurers to three, from five with the largest, UnitedHealth Group, remaining autonomous.

Today, the industry finds itself in a state of utter uncertainty and instability, with President Trump and the Republican-controlled Congress having undertaken to repeal the Affordable Care Act and replace it with something else, the details of which are being left to our collective imagination. Monday’s decision compounded the pervasive uncertainty.

Getting back to Aetna and Anthem, Bloomberg points out that should both mergers crater, Humana will walk away with a $1 billion break-up fee, whereas Cigna could rake in $1.85 billion. That’s a lot of cash and analysts, convinced that at least the Humana-Aetna marriage is likely dead, are already speculating about potential alternative targets for merger partners.

Weighing-in first is Wells Fargo’s Peter Costa:

“The likelihood of getting a new view or an appeal under the new administration’s DOJ seems ‘less likely.’” He adds that “Aetna and Humana are attractive investments without the merger.”

Costs rates both companies “outperform.”

Next up is JPMorgan’s Gary Taylor:

“Aetna went ‘too big’ on market definition and ‘too small’ on divestitures. Emails related to Molina and exit from ACA exchanges created ‘bad optics.’ Odds of an appeal are low.”

Taylor rates Aetna and Humana “overweight” with price targets of $129 (8% upside) and $202 (1% upside), respectively.

Finally, Leerink’s Ana Gupte chimes in, saying she sees Cigna, Express Scripts and CVS Health as potential bidders for Humana. She adds that Medicare Advantage is the “most fundamentally positive” story within the managed-care sector. She rates Humana and Aetna “outperform” with price targets of $250 (24% upside) and $128 (8% upside), respectively.

Then there’s the possibility that Cigna and Humana could merge, a marriage the two companies allegedly contemplated before they picked higher bidders. Approval by regulators and the judiciary for such a marriage isn’t promising, even though they have less respective overlap in their markets than with their current suitors. Keep in mind that once upon a time antitrust connoisseurs gave the thumbs-up to the Aetna-Humana combination.

Putting aside the possibility of a Cigna-Humana union, potential alternative targets shrink quickly in size. Bloomberg says Humana or Cigna could ink deals for Centene Corp., WellCare Health Plans or Molina Healthcare.

And a truly cathartic deal, like buying top pharmacy benefits manager Express Scripts, would be much more costly and complex than any of the obvious insurance targets. The drug wholesale business is withering as market and political pressures increase.

Hospitals and other healthcare providers also are hunkering down under the overhang of likely decreases in Medicare and Medicaid funding.

Steve's Take: Unparalleled uncertainty in regulatory climate makes mega-mergers very difficult Click To Tweet

The obvious problem with assessing a potential target in today’s regulatory climate is the unparalleled uncertainty. Even many of the rank-and-file GOP officials on Capitol Hill and in governors’ mansions are scratching their heads trying to discern what the industry will resemble once Trump’s lieutenants are finished with it.

What this ruling portends is anyone’s guess at this point. Bowing to pressure from Wall Street to hurry up and do something else just doesn’t seem prudent, let alone sane, given the prevailing atmosphere of uncertainty under the GOP’s “repeal and replace” conundrum. If the healthcare industry has ever needed to adopt a wait-and-see stance, that time has arrived.

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