Private health insurance is dominated by “the Big Five”. In a scramble to become even bigger, four of the Big Five want to merge—Aetna wants to buy Humana for $37 billion, and Anthem wants to buy Cigna for $54 billion.
If these mega-deals ultimately succeed, private health insurance in America would be forever changed. If you want to get the most affordable Van insurance visit One Sure Insurance for more ifno.
The Big Five would become the big three.
But the U.S. government, with the full support of the American Medical Association (AMA)—the largest physician trade group in the world—filed a lawsuit on July 21, 2016 to block Aetna from buying Humana and Anthem from buying Cigna.
A Monopoly by Any Other Name
Joining the U.S. Department of Justice (DOJ) in this lawsuit were the attorneys general of the states most affected by these deals—Delaware, Florida, Georgia, Illinois, Iowa, Ohio, Pennsylvania and Virginia and the District of Columbia.
The government’s complaint alleges that these titanic transactions would: “lead to higher health insurance prices, reduced benefits, less innovation, and worse service for over a million Americans.”
And the government pointed specifically to two programs which insure senior citizens and low to moderate income families—the Medicare Advantage plans, which are market-based alternatives to traditional Medicare and the public health insurance exchanges established by the Affordable Care Act.
Humana is the second-largest Medicare Advantage insurer providing coverage to more than 3.1 million individuals in the U. S. Over the past three years, Humana has added more Medicare Advantage customers than any other insurer. Before agreeing to merge with Aetna, Humana was projecting continued enrollment growth in its Medicare Advantage business.
Aetna is the fourth-largest Medicare Advantage insurer in the country. Between 2012 and 2016, Aetna entered more new counties—over 300—than any other Medicare Advantage insurer, almost doubling its footprint. Before agreeing to merge with Humana, Aetna planned to grow to become “the largest [Medicare Advantage] expansion in [the] company’s history” in 2017.
Aetna and Humana, before this prospective merger, competed against each other in more than 600 counties—nearly 90% of the counties where Aetna offers Medicare Advantage.
Medicare Advantage serves over six million seniors in these counties, nearly two million of whom have enrolled with Aetna or Humana.
According to the government’s suit, Aetna’s attempt to buy Humana undermines the central role that competition is meant to play in Medicare Advantage and on the public exchanges which is to hold down healthcare costs and improve quality for seniors, families, and individuals.
Indeed, one of the governing principles of the Medicare Advantage program, as described by the Centers for Medicare and Medicaid Services (CMS), is that insurers “are under continued competitive pressure to improve their benefits, reduce their premiums and cost sharing, and improve their networks and services.”
The government’s lawyers then connected the dots saying that the merger would reduce competition and therefore violated Section 7 of the Clayton Act.
The largest physician organization in the country, the AMA, agrees.
“A lack of competition in health insurer markets is not in the best interests of patients or physicians, ” said AMA President Steven J. Stack, M.D. “If a health insurer merger is likely to erode competition, employers and patients may be charged higher than competitive premiums, and physicians may be pressured to accept unfair terms that undermine their role as patient advocates and their ability to provide high-quality care. Given these factors, AMA is urging federal and state regulators to carefully review the proposed mergers and use enforcement tools to preserve competition.”
The Aetna/Humana Merger
Aetna is the nation’s third-largest health insurance company and offers insurance services to 23.5 million people and collected $60 billion in premiums. By 2020, management had projected $100 billion in revenue by, in large part, expanding its Medicare Advantage business and growing its presence on the public exchanges.
The U.S. government effectively comprises approximately 40% of Aetna’s sales.
Humana is the nation’s fifth-largest health-insurance company, with nearly 14.2 million enrollees and more than $54 billion in revenue. Between 2014 and 2016, it added more individual Medicare Advantage enrollees than any other insurer in the nation.
The U.S. government effectively comprises approximately 75% of Humana’s sales.
The two companies began merger talks in March 2015. Those talks, according to Security and Exchange Commission (SEC) filings, were prompted in part by the announcement that Anthem and Cigna were trying to merge. In fact, according to SEC documents, Aetna felt an urgency to acquire Humana so that it could get a “first mover advantage.” The two companies moved very quickly, inking the $37 billion deal on July 2, 2015. Hard on the heels of that announcement (July 23, 2015) Anthem agreed to acquire Cigna for $54 billion.
All four companies realized that they were dangerously close to violating antitrust laws. When Humana raised this issue, Aetna agreed to a $1 billion break-up fee if the merger is not consummated by December 31, 2016. That’s about five months from now.
Aetna’s lawyers circulated a list of “words to avoid, ” to its board of directors which included terms like “markets, ” “dominate/dominance, ” and “consolidate.”
How Bad Could This Get?
To measure market concentration, courts often use the Herfindahl-Hirschman Index (HHI) as described in the Merger Guidelines. HHIs range from 0 in markets with no concentration to 10, 000 in markets where one firm has a 100% market share.
Aetna’s proposed merger with Humana affects most directly 364 counties (see chart at the top of this article). In 70 of these counties, this merger would create a 100% Medicare Advantage monopoly. In 100 additional counties, the two companies are #1 and #2 Medicare Advantage sellers so they would dominate those markets.
In all the other counties, the merger would end the current strong competition between Aetna and Humana. In 2017, for example, Aetna has been planning to introduce Medicare Advantage plans in 11 counties where Humana previously had a Medicare Advantage monopoly. That wouldn’t happen.
Eliminating the Competition
Three months before the merger was announced, Aetna’s head of Medicare Advantage described Humana as Aetna’s “most formidable competitor, ” stating that “[w]e compete with them everywhere and they have momentum.”
In Atlanta, Georgia, Humana expressed concern in late 2014 that Aetna had “the most competitive benefits for a major plan in the market” and worried that its own plan would “suffer from Aetna’s potential gain.”
In 2015 an Aetna executive called Humana one of their “strongest competitors” in Atlanta.
When preparing its 2016 plan offerings in Kansas City, Missouri, Aetna sought to “maximize the opportunity of competing against Humana.”
In 2015 Aetna introduced a “low price PPO to compete with Humana’s $10 [Regional] PPO that led market growth” in San Antonio, Texas. Aetna introduced a similar PPO [Preferred Provider Organization] product “with competitive premium to compete with Humana PPO” in Las Vegas, Nevada.
That would end.
Aetna’s Healthagen subsidiary and Humana’s Transcend subsidiary compete against each other to provide doctors and hospitals with tools to share health data across various platforms.
One of those programs would go.
The “Obamacare” Link
Aetna and Humana are also leaders nationally in providing insurance services via Obamacare’s public exchanges. According to the U.S. government complaint, Aetna and Humana would have an a priori violation of the Clayton Act in each of the following counties:
- Florida: Broward, Palm Beach, and Volusia counties;
- Georgia: Bibb, Chatham, Cherokee, Forsyth, Fulton, Gwinnett, Houston, Muscogee, and Peach counties; and
- Missouri: Clay, Greene, Jackson, Jasper, and Newton counties.
In Atlanta, Georgia, the government says, Aetna monitored and expressed concern about the pricing of its “number one competitor, Humana.” Similarly, Humana developed an “approach of monitoring Aetna’s filings closely in our largest markets, and amending or revising our rates (by a few points) to maintain share” in Florida and other states where they compete.
Both Aetna and Humana have written that they view health insurance sold directly to individuals and families as central to future competition in the health-insurance industry. Humana’s CEO sees health insurance “moving to an individual-based insurance product, ” and Aetna’s CEO echoed that the “market is moving more toward a retail marketplace.”
Merging Aetna and Humana would end this competition.
Aetna Tries to Fix it
Aetna has proposed to sell off pieces of either its or Humana’s Medicare Advantage business in response to U.S. Government concerns. Aetna has started that divestiture process but no purchase agreements have been announced yet. Aetna’s proposal is to, in effect, transfer to another health insurer parts of Aetna’s and Humana’s contracts with CMS which cover individual enrollees.
The DOJ lawyers don’t buy it. For one thing, they don’t like Aetna choosing the new providers.
But, even more concerning to the DOJ is that Aetna is proposing to sell only parts of contracts—effectively stripping those contracts of the infrastructure required to service Medicare Advantage enrollees. Any buyer of those contracts would have to come with their own contracts with doctors and hospitals, technology platforms, claims processing systems, or employees with specialized knowledge. Remember, these are counties where Aetna/Humana have effectively 100% market share currently. By definition, no other company exists in those counties with Medicare Advantage contracts with doctors and hospitals.
Just Cancel the Mergers
The Department of Justice wants the courts to block not only these two transactions, valued somewhere north of $90 billion but also permanently enjoined and restrained these four companies from ever combining in the future.
In short, the DOJ wants to keep the private insurance markets competitive.
Oh, and the government would also like the insurers to pay the governments costs in bringing this lawsuit.
Bottom line, all of these issues have to be resolved in about five months or the deals turn into pumpkins. Call it a “Cinderella Effect.”
