Stick a fork in it: health insurance mergers head to $2.85B break-up fee end; ANTM, CI, AET, HUM

On Thursday afternoon, the Department of Justice formally announced that is has filed suit in D.C. District Court to stop the mergers of AET and HUM and ANTM and CI. We have been dubious of the ANTM/CI merger since CMS barred CI from selling Medicare Advantage plans in January and cited problems with integration of the HealthSpring acquisition. The AET/HUM merger, we thought stood a better chance. Both mergers have now been overtaken by politics and policy and even if the four companies fight the DOJ's efforts to enjoin their respective mergers, we estimate the probability of their success at near zero.

Most of the government's concerns about market concentration and the anti-competitive issues in the Medicare Advantage and the public exchanges have been widely anticipated, so much of what is in the DOJ's complaint is not news. What is unusual, is the DOJ's use of certain policy arguments to thwart the mergers. They argue that the ANTM/CI merger, and to a lesser extent the AET/HUM combination, will inhibit payer and provider transition to the alternative payment structures the Obama administration has championed through the Center for Medicare and Medicaid Innovation (CMMI). For that reason, providers, payers, their bankers and lawyers might want to rethink obtaining horizontal scale as their sole strategy for addressing the demands of the Affordable Care Act.  If you want to spare yourself from reading the actual complaint, below are the major arguments put forward by the DOJ, followed by our key takeaways. If you want a copy of the two complaints, send us a note.

AET/HUM - Plaintiffs in this case include the United States and the States of Delaware, Florida, Georgia, Illinois, Iowa, Ohio, Pennsylvania, Virginia, and the District of Columbia. The major arguments the DOJ is putting forward are:

1. The merger would reduce competition for the sale of Medicare Advantage Plans.

• In their complaint, the DOJ argues that Medicare Advantage plans are a specific and distinct market that must be separated from all of Medicare for the purposes of analyzing competition. In making this argument, DOJ appears to be responding to or anticipating AET/HUM's assertion that the market should be defined more broadly and include all Medicare coverage options, not just Medicare Advantage plans.
• Because AET/HUM compete against each other - according to Justice, in 90 percent of counties where the AET offers Medicare Advantage plans it competes directly with HUM - reduced competition would harm seniors in 364 U.S. counties. The DOJ points to comments from executives at AET and HUM indicating the both considered the other to be the main source of competition in the Medicare Advantage market.
• The competition that exists today - and which according to the DOJ must be preserved - has led to a higher quality programs as supported by AET and HUM's star ratings from CMS.

2. The merger would lessen competition for the sale of insurance plans sold on the ACA exchanges.

• As they do with the Medicare Advantage market claims, the DOJ argues that the public exchanges are a distinct market. Most individual insurance plans are sold through the public exchanges and the merger would reduce competition in this area. Further, because the federal government provides premium support only for those plans purchased on the exchanges, there is no alternative for enrollees.
• DOJ cites 17 counties where the merger would be harmful to individuals and families because it would limit competition. In these 17 counties, there is already limited competition and the merger would exacerbate current competitive conditions. The DOJ notes that United Healthcare's decision to withdraw from the public exchanges will likely make things even worse. Those counties cited by DOJ are:
• Broward, Palm Beach and Volusia Co., Florida
• Bibb, Chatham, Cherokee, Forsyth, Fulton, Gwinnett, Houston, Muscogee and Peach Co., Georgia
• Clay, Greene, Jackson, Jasper and Newton Co., Missouri

3. The mitigation plans offered by AET and HUM would not reduce the anti-competitive influence of the proposed merger.

• Apparently, AET and HUM offered a divestiture plan to transfer its Medicare Advantage contracts with CMS to another entity. THE DOJ does not name the other company but notes a number of problems:
• The buyer would not receive any intact business units. The divestiture proposal apparently calls for selling parts of the Medicare Advantage contracts. According to the DOJ, the AET/HUM infrastructure to support the Medicare Advantage health plans would not be available to the buyer of the contracts.
• Consistent with DOJ's assertion that the buyer of the AET/HUM Medicare Advantage contracts or portions thereof, they also claim that the buyer would not have the necessary contracts with doctors and hospitals, technology platforms, claims processing systems or employees with specialized knowledge.
• According to the DOJ, the buyer the AET/HUM Medicare Advantage contracts would not receive complete groups of Medicare Advantage enrollees enrolled under particular contracts between Aetna or Humana and CMS. The proposed divestiture would involve picking out enrollees from within these contracts - presumably those residing in those counties where the merger reduces competition - transferring some of them to the buyer, and leaving others with Aetna or Humana. The DOJ believes this process would require significant oversight by CMS.
•  The DOJ believes the buyer would not receive assets sufficient to give it the scope and scale of Aetna and Humana because the buyer would not acquire enrollees in related lines of business or geographic areas, including:
• Enrollees in Medicare Advantage special needs plans;
• Enrollees in group Medicare Advantage plans;
• Enrollees in any plans sold to employer groups;
• Enrollees in Medicare Advantage plans in counties adjacent to the counties where Aetna and Humana have proposed divestitures.
• Neither the Aetna nor the Humana brand would transfer to the buyer.
• In short, the DOJ believes the divestiture plan would result in lower sales volume and lower market shares, be less efficient, be of lower quality, provide fewer opportunities for innovation, and otherwise fail to replicate the competition between Aetna and Humana now. The DOJ also believes that the proposed remedy would impose a heavy burden on the Court, the Plaintiffs, and CMS because it would require oversight of Aetna, Humana, and the buyers’ businesses in hundreds of markets throughout the United States. Further, the DOJ claims that CMS would be required to manage the transfer of some enrollees in some counties from Aetna or Humana to the buyer, and the Plaintiffs would need to monitor the ongoing relationship between Aetna and the buyer.
• The divestiture proposal only seeks to address the harm to Medicare Advantage consumers. It does not even attempt to address the loss of competition for individuals and families purchasing health insurance on the public exchanges, according to the DOJ. On this last point, the DOJ, as of last week, may have a weaker argument. HUM announced that it was reducing its presence on the public exchanges from offering plans in 1,351 counties in 19 states to 156 counties in 11 states. We have to believe that the counties HUM crossed of its list include those that present antitrust concerns for the DOJ thus rendering at least a portion of this argument moot.

ANTM/CI -  In this lawsuit, the government is joined by the states of California, Colorado, Connecticut, Georgia, Iowa, Maine, Maryland, New Hampshire, New York, Tennessee, Virginia, and the District of Columbia. In their complaint, the DOJ sounds a little like a marriage counselor who has concluded that the union is so flawed as to be beyond hope. They point out that the two companies have no divestiture plan, the merger does not appear to fit Anthem's business model and, hell, they don't even like each other. The DOJ's main arguments are:

1. The merger would lessen competition in the sale of health insurance to national accounts.

• As it did with the AET/HUM merger, the DOJ defines the market affected by the merger. In the case of this merger, one relevant market is the sale of commercial insurance to national accounts. National accounts, as the term is used by the DOJ, are large employers who self-insure and require multistate provider networks. The DOJ cites two relevant geographical areas that would be negatively affected by the merger - the 14 states in which Anthem sells under a Blue license and the entire United States where ANTM and CI compete for national accounts. In the 14 ANTM Blue states, ANTM and CI have 40 percent market share. For national accounts across the U.S., ANTM and CI have a combined market share of at least 30 percent, according to the DOJ.
• According to the DOJ, as a result of the merger, the competition for national accounts between CI and ANTM would be lost; CI would not compete as hard against other Blue plans for national accounts because CI's parent company, ANTM would likely receive significant BlueCard fees if a Blue plan won the account; and ANTM would have a reduced incentive to compete aggressively with the CI brand because the Blue Cross and Blue Shield Association’s best-efforts rules would limit CI growth relative to ANTM's.

2. The merger would reduce competition for the sale of health insurance in the large group market.

• The large group market is defined as a relevant market by the DOJ and refers to employers having 50 or more (100 in some states) employees. The geographical market affected, according to the DOJ are at least 35 MSAs including New York City, Atlanta, Los Angeles and San Francisco.
• According to the DOJ, the two companies compete on reimbursement rates which are better for large group employers. The DOJ also notes that CI competes with ANTM on customer service and innovative programs. The DOJ is under the impression that CI has superior service while ANTM does not. (As an aside, the anecdotal evidence offered by news reports does not exactly support the DOJ's impression but we doubt the companies are going to resort to a defense that suggests they both have poor service.) Also, CI introduced a "level funded" program that calls for a portion of premiums paid throughout the year to be returned to the employer if claims were lower than expected. In response, ANTM introduced a similar product. CI has also introduced value-based programs in collaboration with providers.

3. The merger would lessen competition in the sale of health insurance on the public exchanges.

• The DOJ makes pretty much the same arguments in the ANTM/CI merger as it does in the AET/HUM combination. The DOJ cites 22 jurisdictions where competition on the exchanges will be reduced by the merger:
• Adams, Arapahoe, Boulder, Broomfield, Denver, Douglas, Eagle, Jefferson, La Plata, Lake, Montezuma and Summit Co., Colorado
• Franklin, Jefferson, Lincoln, Saint Charles, Saint Francois, Saint Louis, Saint Louis City, Sainte Genevieve, Warren and Washington Co., Missouri
• Unlike the AET/HUM merger where HUM just announced a significant reduction in participation on the public exchanges, CI has actually indicated it wil be expanding its presence in the individual market, heightening the DOJ's concerns.

4. The merger would lessen competition for the purchase of health care services.

• This argument is unique to the ANTM/CI merger as the DOJ does not mention this anti-competitive factor in the AET/HUM complaint.
• The DOJ defines the purchase of health care services as a distinct market and argues that the merger will reduce competition and create a "take-it-or leave-it" negotiation between provider and the new combined company in the 35 MSAs discussed above.
• The merger would harm doctors, hospitals and their patients because the monopsonist position of the combined company would pressure reimbursement rates which in turn will limit access to care.
• Approval of the merger would slow the shift to value-based contracting in the health care system. Here, the DOJ seems to be acknowledging what policy makers have griped about for years: large insurers seem uninterested in innovative reimbursement and care models. In this regard, the DOJ is arguing that the ANTM/CI merger contradicts a significant public policy objective of the Obama administration. Recall that in January 2015, as part of larger value-oriented contracting goals, HHS formed the Health Care Payment and Learning Action Network. The HCP-LAN is a movement to tie payments to quality through a collective effort of a wide variety of organizations. DOJ has noted that because of ANTMs already dominant position, it tends to have lower reimbursement rates and less provider collaboration. The DOJ believes that ANTM will apply the lower reimbursement to CI members, thus endangering the value-based contracting and provider collaboration currently resident at CI. The money quote in the complaint comes from an ANTM executive whose suggests in testimony that ANTM may "have two, conflicting strategies—collaborate in new models on the one hand, and ‘drop the hammer’ on the other.”

5. There is no divestiture plan to address these anti-competitive issues.

• We are not sure what strategy ANTM and CI were deploying in not offering a divestiture plan and so we, only half jokingly, have concluded that the must have stopped taking each other's calls a while ago.

We have been skeptical that the ANTM/CI merger would go forward. The combination always seemed like an arranged, loveless marriage with the groom's family making unreasonable demands for a dowry. Early on the ANTM/CI negotiations seemed hung up on resolving differences that had little to do with shareholder value and the delivery of high quality products and services. Last summer, for example, the boards of both companies engaged in a very public and unseemly - some would say petty - debate on who would become CEO of the combined company. This spring, word of ongoing arguments between the two companies was leaked, probably by company insiders with a bad case of buyer's/seller's remorse. CMS's decision in January to ban CI from selling Medicare Advantage plans while citing CI's struggles with integrating HealthSpring, led us to conclude this merger would run into trouble. What we did not anticipate is the way in which the DOJ would promote Obama health policy through its merger enforcement authority. The DOJ's action seals the deal for this merger and we expect the parties will announce abandonment of the effort any day now - assuming they can agree on who gets to call the reporters and what to do about the $1.85 billion breakup fee.

We have been a little more optimistic about the AET/HUM merger but must now abandon all hope. Certainly, the AET/HUM combination is a little more straightforward. There is no doubt, in another political environment, AET and HUM could probably develop a divestiture plan that satisfies DOJ's concerns about the Medicare Advantage market, HUM having rendered moot the concentration on the public exchanges. In fact, a much discussed Plan B for Anthem is the acquisition of AET and HUM's Medicare Advantage business. However, this is the silly season and both political parties have been critical of the mergers. The candidate favored to win in November, Hillary Clinton has been very specific and outspoken against approval. If either of the mergers were completed, the DOJ and the Federal Trade Commission would likely find themselves out of step with their boss who has endorsed Clinton and by implication her position on the mergers. What is the good news for HUM shareholders? AET must pay a $1B breakup fee. Nice work if you can get it.

All is not lost - assuming, unlike us, that you thought these mergers were a good idea for somebody other than lawyers and bankers. The DOJ intervention provides some valuable insight into the Obama Administration (and most likely a Clinton Administration) view of health care M & A and the role of payers. Our key takeaways:

• The Obama Administration is coordinating its health policy across the administration. The DOJ's concerns about the implications on value-driven contracting reflect the Obama Administration's efforts to make the CMMI a laboratory for payment changes that can be adopted by commercial payers. Reduced competition, particularly in the sale of employer-based plans, threatens that policy goal.
• As CMS knows all too well, reimbursement reductions do little to actually curb health care spending and, in fact, increase utilization as providers seek to protect margins. Certainly, these mergers would have resulted in significant pricing power for the surviving companies which could be used to lower reimbursement and "bend the cost curve." The Obama Administration decided to forego that policy direction in favor of one that enables innovation in payment models.
• Policy analysts have quietly complained for years about the lack of engagement from insurers on developing different care and payment models. Admittedly, there was little incentive to do so especially in the large group market where 160 million Americans get their insurance and for which large insurers assume little to no risk. The Obama Administration wants to keep the field open enough to allow insurers to compete on factors other than just price and encourage new entrants like Oscar.
• Scale accomplished through vertical integration is more likely to find a warm reception at the FTC and DOJ than horizontal mergers. The FTC has made this point repeatedly over the last 18 months or so yet inexplicably the industry continues to present deals like the AET/HUM and ANTM/CI mergers. It might be time for providers and payers to think a little more creatively about their business combination aspirations.

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