Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Aetna warned the government in a July letter that it would be financially forced to step back its participation in Obamacare's individual insurance exchanges if the Justice Department tried to block its $28 billion purchase of Humana.

Guess what happened. 

Now, the company is being raked over the coals by politicians after this week saying it will stop selling individual Obamacare plans next year in 11 of the 15 states where it had been participating in the program.

It's easy to see why lawmakers are upset. The move will disrupt the insurance of tens of thousands of low-income Americans and leave some with zero options. But leaving the exchanges is a defensible business decision. The company expects to lose a bunch of money, at least $300 million in 2016, and so does every other big health insurer (which is why most of them are pulling back, too). A busted merger could heighten losses.

Costly Care
Aetna has been spending more on medical care for patients buying insurance through the individual Obamacare exchanges.
Source: Bloomberg
Represents the per-dollar amount of premiums received that are spent on medical care.

The exchanges need fixing, and required changes aren't expected to happen any time soon. And if the company uses its participation in a market as a negotiating lever? Fine. That's nothing new in a regulated industry. The company is saying losses drove its departure, not the DOJ's decision. But even if it's a bit of both, the move makes sense. 

Aetna's commitment to the Affordable Care Act has deteriorated rather rapidly. The company trumpeted support for the program in November as UnitedHealth, America's largest health insurer and the only one of the biggest five that didn't happen to be chasing a mega-merger, became the first to announce it was reconsidering its exchange participation due to heavy losses. In April, Aetna still intended to expand to 20 states. Over the course of a couple of months that happened to include the announcement of the DOJ's suit to block its merger, it ended up deciding to pull back.   

The letter and the rapidity of the company's shift  suggests there was a political element to its continued participation in the face of losses. Any company in a heavily regulated business needs good relations with the government. It may -- to pull a completely random example out of a hat -- need to overcome an antitrust hurdle for a mega-merger.

Now that the DOJ is attempting to block the merger, there's arguably less reason to stick around and keep losing money. The case is in a judge's hands now. And by exiting states in which it has exchange overlap with Humana, the company is weakening DOJ arguments about the deal's anti-competitive properties.

Deal Doubts
The spread between Aetna's offer and Humana's share price is below peak levels reached in July, but investors still seem to doubt the deal will make it.
Source: Bloomberg

In the letter, Aetna CEO Mark Bertolini says the company's ability to withstand further exchange losses depends on realizing expected synergies from the Humana acquisition. And he writes that the losses would be further exacerbated if the deal breaks down because it may have to pay a breakup fee, and would also be on the hook for unrecoverable transaction and integration costs, the carrying cost of debt raised to finance the transaction and litigation expenses.

At any magnitude, those are unpleasant add-ons to an already ugly-looking business. The company's medical loss ratio, the amount of a given premium dollar it spends on medical care, has spiked this year in large part because patients on exchange plans are sicker than expected. Other companies have experienced the same phenomenon. In the absence of reforms to the law that compensate for that, the trend and others driving losses seem likely to continue.  

This is an outcome that makes no one particularly happy. The government wants robust competition in exchange markets. Aetna would prefer to be making money on a large and potentially growing market. But absent some politically unlikely changes to the ACA, this exit was probably inevitable sooner or later. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net