What’s Next After Feds Move To Block Insurance Mergers?

July 22--A proposed $54 billion acquisition of Cigna Corp. by Anthem Inc. could be dead following a decision announced Thursday by the U.S. Department of Justice challenging the deal in federal court, two industry analysts said.

But a separate $37 billion acquisition sought by Aetna Inc. of Humana Inc. could still go through, although Hartford-based Aetna may be forced to give up more of its business to win federal approval. One analyst believes Aetna will be forced to instead look to buy smaller industry players.

The Justice Department said the two deals threatened to undermine consumer choice and that Aetna and Anthem failed to propose business divestitures that would be sufficient to maintain market competition.

Morningstar analyst Vishnu Lekraj said the Anthem-Cigna deal "has been in trouble from the beginning."

"It was pretty much a forced marriage," he said.

He cited news reports that the management teams of the two companies did not get along well, that the two sides disagreed over details of a merged operation and who would run the company.

"They did not do themselves a favor by not presenting a united front to the DOJ," Lekraj said.

Spencer O. Perlman, a health care analyst at Height Securities, said the Anthem-Cigna deal is "probably unraveling."

He cited a Cigna news release from shortly after the Justice Department announcement in which the Bloomfield-based insurer did not pledge to work with Anthem. Cigna instead said it's "currently evaluating its options."

In its agreement with Anthem, Cigna is due a $1.85 billion break-up fee if the deal is rejected. Cigna won't be paid if it made a "willful breach of its obligations to complete the mergers," according to the agreement.

Aetna would have to pay Humana $1 billion if the merger fails.

William Baer, assistant attorney general, said at a news conference that divestiture proposals required to preserve competition were "inadequate, incomplete and totally unlikely to solve the competitive problems we've identified."

Anthem and Aetna suggested they would sell off small pieces of their business to smaller insurers "who lack brand name," he said.

The Department of Justice demanded that the competitive marketplace now in place be preserved after the divestitures.

"We have zero confidence that the proposals that have been made to us come close to meeting that standard," Baer said.

Thomas Greaney, a former Justice Department antitrust official who now teaches at the St. Louis University School of Law, said the forcefulness of the agency's rejection of Aetna's divestiture proposals was "noticeable."

"They made a pretty elaborate case against whatever was put on the table," he said.

As a result, it "sort of locks in" the Justice Department's position over the adequacy of Aetna's divestiture proposals, possibly forcing the issue to a federal judge who will decide to uphold the Justice Department or rule in favor of Aetna and Humana.

Mark Bertolini, Aetna's chief executive officer, told Bloomberg that the insurer is willing to divest more of its Medicare Advantage plans, which are a private form of the health insurance program offered to seniors.

Jeffrey Loo, an equity analyst at S&P Global in New York, said based on the strong Justice Department position on the absence of a convincing divestiture plan, Aetna and Humana will have an "uphill battle" to prevail.

"I wouldn't put too much money on it," he said.

Aetna may ultimately look to buy smaller health insurers "that don't have these challenges."

Based on two previous settlement negotiations, Perlman said an Aetna deal with the Justice Department could be wrapped up by October. But because the issue of competitition in the consumer-oriented health insurance markets, particularly among senior citizens who typically vote in greater numbers than other groups, a decision might not be announced until after Election Day Nov. 8, he said.

However, Baer rejected any suggestion that politics were at play or that there was any involvement with the White House or senior officials at the U.S. Department of Health and Human Services.

"This was a law enforcement decision that we make on the merits," he said.

___

(c)2016 The Hartford Courant (Hartford, Conn.)

Visit The Hartford Courant (Hartford, Conn.) at www.courant.com

Distributed by Tribune Content Agency, LLC.