Health Insurer Deals Face Market Review That Felled Past Tie-Upsby
Anthem, Aetna acquisitions assessed for their national impact
Economists say shift from local analysis could hinder approval
U.S. opposition to proposed mergers in the pay-TV, mobile-phone and airline industries suggests a tough battle ahead for two health insurer deals: Anthem Inc.’s takeover of Cigna Corp. and Aetna Inc.’s bid for Humana Inc.
It’s the job of antitrust officials to make sure that deals don’t harm competition, and they commonly do that by evaluating local markets for conflicts: Are enough airlines serving Minneapolis? Are enough supermarkets competing in the Northeast section of Washington? Under that model, it typically takes only a few strategic divestitures -- the sale of a Minneapolis route to a competitor, for example -- to get approval for the broader deal.
But antitrust enforcers with the Obama administration’s Justice Department and Federal Trade Commission have shown a willingness to change that playbook and take a wider look at competition. They have opposed a string of proposed combinations between big rivals -- like the merger of American Airlines and US Airways, and Comcast Corp.’s failed deal for Time Warner Cable -- when they see harm to competition nationally, not just locally.
That view is relevant to the Anthem and Aetna deals, which would eliminate two of the biggest U.S. insurers, leaving just three. The Justice Department has been investigating both deals since last year.
Bill Baer, the No. 3 official at the Justice Department and the former chief of its antitrust division, has said the deals represent a “game changer” for the industry. He told lawmakers in March that the department was examining how the tie-ups might affect competition locally and nationally.
“When the antitrust authority determines that competition takes place in a national market, that presents challenges for merging companies,” said Fiona Scott Morton, a former chief economist in the antitrust division now at Yale University’s business school. “The standard solution of offering some isolated divestitures in the worst-affected cities or states may not satisfy a regulator that is looking to see competition preserved at the national level.”
The insurers are pressing the government to focus on local competition, setting up a potential clash with the Justice Department that could lead to challenges by antitrust enforcers. The government could sue to block them or require the companies to sell portions of their business to other insurers.
“It is important to recognize that health care is fundamentally local,” Anthem’s chief executive officer, Joseph Swedish, told lawmakers last year. “Locally based, locally delivered, and locally consumed.”
Spokesmen for Anthem, Aetna and Cigna declined to comment on how their national market positions might affect regulatory reviews of their mergers. Humana didn’t respond to requests for comment.
Cigna warned investors in a regulatory filing on May 6 that it may not hit its target for closing the $48 billion sale to Anthem this year, citing the “complexity of the regulatory process.”
Even where markets have traditionally been defined as local, the antitrust division in recent years has been willing to look at whether national markets could also be harmed, said Mark Ryan, a lawyer at Mayer Brown in Washington who formerly worked in the antitrust division under Baer.
“This Justice Department does not simply accept that, because in the past, in certain industries, they’ve focused on local markets that’s how all future deals should be viewed,” Ryan said. “As industries evolve, they’re willing to ask whether there is another market, a national market that we should be evaluating.”
Corporate takeovers over the last few years have stumbled when antitrust watchdogs looked at competition nationally.
AT&T Inc. abandoned its bid for T-Mobile US Inc. in 2011 after the U.S. said the deal would harm competition by reducing the number of national carriers to three, even though wireless service is purchased locally. When the Justice Department challenged the combination of American Airlines and US Airways in 2013, it didn’t just look at competition on local routes. Rather, it said the deal would consolidate the entire airline industry to just four national airlines, which could coordinate more easily to raise fares and fees.
American and US Airways ultimately won approval to merge by selling assets at several major airports to low-fare airlines including Southwest Airlines Co. and JetBlue Airways Corp., transactions aimed at increasing competition nationally.
In health insurance, insurers that offer commercial policies and coverage under the Medicare Advantage program have become more dominant as their market shares have increased, according to Leemore Dafny, a professor at the Kellogg School of Management at Northwestern University.
Blue Cross Blue Shield plans, Anthem, UnitedHealth Group Inc., Aetna and Cigna controlled about 83 percent of the commercial insurance market in 2014, up from 74 percent in 2006, according to Dafny’s estimates. In Medicare Advantage, Blue Cross Blue Shield plans, UnitedHealth, Humana, Aetna and Anthem controlled 61 percent of the market in 2015. The leading firms controlled 57 percent of the market in 2007.
A national market review poses a potentially higher hurdle for the Anthem-Cigna deal because it would reduce competition in the market for health plans known as “administrative services only,” in which employers self-insure their employees, said Jennifer Rie, an analyst at Bloomberg Intelligence in New York.
Anthem has 19 percent of that market, which would jump to nearly 30 percent with Cigna, according to data compiled by Bloomberg. By contrast, Aetna’s share would rise less than 1 percentage point, to 11.5 percent, by buying Humana.
Advocates for the Anthem-Cigna tie-up say the deal could benefit some self-insured employers, which could see lower costs even if Anthem raises administrative fees after the merger, according to Maurice Stucke and Allen Grunes, antitrust lawyers at the Konkurrenz Group in Washington who are consultants to Cigna’s law firm.
That’s because by combining with Cigna, Anthem could negotiate better discounts from hospitals and other health providers, leading to lower costs, they said. Those savings could then be passed on to employers.
“This is not as simple as one less competitor leading to higher prices,” said Grunes, a former Justice Department lawyer. “National customers may actually be better off.”