Judge Backs DOJ Effort to Stop Aetna-Humana Merger
Jessica Mehta • Fri, January 27th, 2017
U.S. District Judge John D. Bates ruled against the $37 billion purchase of Humana by Aetna on Monday, January 23, 2017. The proposed Aetna-Humana merger was blocked and his reasoning came in the form of a 156-page opinion document. The Department of Justice (DOJ) brought the complaint against Aetna, claiming that merging the two mega companies would drastically reduce Medicare Advantage plans competition in 364 counties, 21 states, and affect over 1.5 million Medicare Advantage customers.
Humana is headquartered in Louisville, Kentucky. It’s the fifth largest health insurer in the country, operating in every state and insuring 14 million people. The company reported $54 billion in revenues in 2015. Aetna is based in Hartford, Connecticut, and is the third largest insurer in the country. It also operates in every state and insures 23 million people. Aetna reported $60 billion in 2015 revenues.
Aetna representatives said the company will likely appeal the decision, although that will still require months of litigation. Aetna spokesperson T.J. Crawford told Bloomberg, “We’re reviewing the opinion now and giving serious (sic) to consideration to an appeal after putting forward a compelling case.”
According to the 156-page document, the proposed merger’s “proffered efficiencies do not offset the anti-competitive effects of the merger.” Already in 2017, Aetna has withdrawn from 17 counties. Judge Bates notes these moves were “specifically to evade judicial scrutiny of the merger.” Along with the DOJ, consumer groups also celebrated the ruling.
Attorney David Balto of Washington, D.C., who represents numerous organizations that oppose the merger, says Judge Bates’ decision is a major victory. “The DOJ and the court heard and answered that call. The evidence was crystal clear that when health insurers merge, consumers lose by paying higher premiums and receiving poorer health care, ” Balto told the Courier-Journal. “The evidence was compelling that the merger would harm millions of vulnerable Medicare beneficiaries and that the attempts to present a potential buyer to solve the problem were no more than a Potemkin village. Even the most expensive economist money could buy couldn’t save this deal.”
As a bonus or consolation prize (depending on whom you ask), Humana employees who are based in Louisville, Kentucky, “won’t have to move to Connecticut, ” says Balto. Humana is the only Fortune 100 company operating in Kentucky.
Not Such Sweet Beginnings
Judge Bates’ ruling didn’t come as a shock for Louisville leaders, who have been prepping for such an outcome since last summer. When the DOJ announced the lawsuit to block the Aetna-Humana merger on July 21, 2016, many local leaders noted they were “monitoring the situation, ” including Mayor Fischer. Unsure of what was in store for the city, which depends on Humana as a major employer, a number of notables spoke out about the uncertainty of the merger. President and Chief Executive of Greater Louisville, Inc., Kent Oyler, was disappointed when he heard about the DOJ’s lawsuit. He says Aetna and Humana have “logged thousands of hours” on the merger.
There were murmurings of possible legal action against the merger for months. However, the DOJ kept stealthy movements by filing separate, yet related, lawsuits in the federal court. When the lawsuits were unveiled in July 2016, one against the Aetna-Humana merger and one against the Anthem-Cigna merger, the DOJ claimed that turning five major health insurers into just three would hurt seniors, working families, employers and healthcare providers.
U.S. Attorney General Loretta E. Lynch also spoke out against the proposed mergers in July 2016. “Competitive insurance markets are essential to providing Americans the affordable and high-quality healthcare they deserve, ” she said in a live-streamed news conference. “These mergers would restrict competition for health insurance products sold in markets across the country and would give tremendous power over the nation’s health insurance industry to just three large companies.”
Principal Deputy Associate Attorney General Bill Baer also spoke at the July news conference, stating, “We all, including seniors, everyday workers and the previously uninsured and underinsured deserve affordable health insurance options. Competition today drives these four successful firms to fight to give us affordable options. There is no reason to put that dynamic at risk.”
The DOJ filed the complementary lawsuits in July with a 39-page complaint detailing how merging Aetna-Humana and Anthem-Cigna would change the entire industry. According to the DOJ’s complaint, seniors are especially at risk in such a merger since they see doctors and/or visit hospitals twice as much as their younger counterparts. Such mergers would “end this rivalry and deny consumers its benefits, ” claimed the DOJ in their July lawsuit documents.
Deputy Assistant Attorney General Sonia Pfaffenroth, part of the DOJ’s Antitrust Division, says, “The proposed mergers would eliminate two innovative competitors…at a time when competition has been pressuring insurers to develop new models of care designed to keep Americans healthier, to deliver healthcare more efficiency and to control the costs of providing care.”
Eight states joined the District of Columbia to challenge the Aetna-Humana merger, including Delaware, Florida, Georgia, Iowa, Illinois, Ohio, Pennsylvania and Virginia. Major metros around the country are home to large-group employers who provide insurance coverage to thousands (and sometimes millions) of employees. Dramatically reducing competition for the millions of people who rely on commercial health insurance coverage from their employers would be a natural side effect of the mergers.
If You Can’t Beat ‘Em…
Like most notorious paramours, Humana might not have been Aetna’s first love. In fact, Aetna may have taken the sage advice of loving yourself before anyone else—Aetna tried to improve their own Medicare Advantage profile before pursuing a merger.
Documents from the July 2016 lawsuit indicate that before agreeing to merge with Humana, Aetna “aggressively” pushed for Medicare Advantage expansion. Since 2012, Aetna has doubled Medicare Advantage coverage and carries the title of the country’s fourth biggest Medicare Advantage provider (by membership). However, Humana touts the title of being the second biggest Medicare Advantage provider by membership.
The DOJ lawsuit claims that if Aetna bought/merged with Humana, the company would effectively dispose of its most valiant competitor in several key markets (specifically counties in Florida, Georgia and Missouri, which encompasses 700, 000 people)—while reaping some major benefits.
The Romeo and Juliet of Health Insurers?
Like any great merger—or almost merger—not everybody is happy with keeping these two apart. Kentucky Governor Matt Bevin tweeted, “disappointing news regarding the proposed Humana/Aetna merger…ruling likely to be appealed….” However, Louisville’s Mayor, Greg Fischer, chose to keep a positive spin on the ruling, saying he’s “optimistic about the future of Humana, whatever the outcome of the merger.” Fischer’s spokesperson, Chris Poynter, says Fischer “believes Humana will continue to be a strong company and an entrepreneurial backbone for the city.”
The attempted merger wasn’t sudden—Humana and Aetna agreed to merge in July 2015. ‘Twas the summer of mass big health insurer merger talks with rivals Cigna, United Healthcare and Anthem also discussing potential mergers. Merging is trending lately in healthcare, with hospitals and healthcare groups teaming up in order to leverage themselves when bargaining with insurers. As hospitals and doctors merge for leverage against mega insurers, the insurers are following suit.
Aetna’s final offer that won Humana over included $37 billion in cash and stock. The DOJ pounced when Humana accepted, but this was only one of two insurer mergers on the DOJ’s radar. A $54 billion merger between Anthem and Cigna was also spotted, and the DOJ has a pending lawsuit to block that merger. (A ruling is expected shortly.)
The DOJ claims that marrying Aetna and Humana within the Medicare Advantage realm would lead to higher prices for medical coverage coupled with fewer options for those 65+. Aetna said that wouldn’t be the case, and the deal would actually lead to lower prices and more choices.
In December 2016, a civil trial brought in economists selected by Aetna and Humana who tackled the DOJ’s claim for anti-competitiveness. The pinnacle of the DOJ’s case was evidence that Molina Healthcare, a California-based business that had already agreed to purchase a big piece of the Aetna-Humana’s future Medicare Advantage business, was largely inexperienced. Simply put, the DOJ claimed Molina wouldn’t be able to come close to mimicking the marketing prowess of Aetna and Humana. Ultimately, Judge Bates agreed with the DOJ.
Prepping for a Pairing
In preparation for the merger, Aetna and Humana “sold off” Medicare Advantage business to Molina to the tune of 290, 000 customers. The move was meant to downplay issues about potential overlap in some primary counties. However, Judge Bates disagreed with the two company’s maneuver. “Molina is not acquiring Aetna’s or Humana’s provider contracts. It therefore will need to build its non-dual Medicare Advantage provider network essentially from scratch, ” he wrote in the 156-page document.
Aetna and Humana tried to argue that Medicare Advantage and Medicare compete on level ground. However, senior costs vary drastically depending on insurance type. Judge Bates points out in the January 23 document that Aetna and Humana “vigorously compete” within the Medicare Advantage realm. “The head-to-head competition benefits seniors who shop for Medicare Advantage plans in the form of broader networks and lower costs.”
Judge Bates was also wary about Aetna’s explanations for withdrawing from 17 key counties where it had previously competed via public exchanges. Aetna executives previously seemed optimistic about their competitive prowess in the exchanges. However, Aetna claimed that after undertaking an analysis of the company’s footprint in those 17 counties, continuing to pursue those regions wouldn’t be wise. Judge Bates wrote that Aetna’s choice to withdraw “was a strategy to improve its litigation position.”
Will Aetna appeal? Will any of these mergers ever take place? Judge Bates says expecting small insurers to step up to the plate and make up the difference isn’t realistic. They simply don’t have the “scope and scale” to play alongside the big boys like Aetna and Humana (merged or not). Are the mergers really a “convenient shortcut to profits, ” as described by Baer, or does Aetna and Humana have a potential relationship that might benefit consumers? This is one sticky bear of a legal throwdown that isn’t even close to a resolution.