There are a variety of reasons for the failure of proposed mergers. are: disputes arise between the companies, which can compromise the deal, or the deal can be denied by the Department of Justice or the Federal Trade Commission. Both the DOJ and FTC are empowered to file lawsuits that prevent firms from merging into a single firm based on antitrust regulations. One of the most common tests for those agencies is to determine the companies’ Herfindahl-Hirschman Indexes to determine how concentrated an industry currently is and how concentrated it would become as an outcome of the merger. If either agency believes the merger will result in an anticompetitive market environment that harms consumers, they will do everything in their power to block it through legal action.
This has become particularly important in the health insurance industry, which has been on the verge of substantial consolidation for years. The industry is already quite concentrated with the vast majority of market share under controlled by five firms: UnitedHealth, Aetna, Anthem, Cigna, and Humana. In the healthcare industry, pricing is often set through negotiations between health providers (such as doctors and hospitals) and payers (insurance companies). The more patients a hospital serves, the more leverage it has in negotiating pricing, and the more people an insurance company covers, the greater its negotiating power. When the Affordable Case Act was passed in 2010, healthcare firms anticipated a massive influx of new patients to serve. They began to consolidate such that they could weather the storm of addressing so many new people and come out of it with more negotiating power than the competition and the rest of the healthcare delivery value chain.
UnitedHealth has successfully acquired and integrated another one of the largest insurance companies, Catamaran. Aetna aimed to merge with Humana, and Anthem aimed to merge with Cigna. However, just two weeks ago, both mergers fell apart. On Feb. 14, love was not in the air for Aetna and Humana, as they decided to end their $34 billion merger agreement as an alternative to appealing a judge’s decision to block the deal on antitrust grounds. In a statement on Feb. 15, Aetna’s CEO Mark Bertolini commented the following: “We still believe that the deal makes sense, the logic of it is very powerful, and we will continue to pursue things we can think of together and still be competitors. And who knows what will happen over the next couple of years?” The hope of the merger would have been to improve affordability and quality of health insurance; however, the current environment presents considerable uncertainty regarding the future structure of the US healthcare system. The amount of time and effort that has been put into this merger makes its failure particularly bitter for Bertolini: “We are disappointed to take this course of action after 19 months of planning, but both companies need to move forward with their respective strategies in order to continue to meet member expectations.” Aetna has also confirmed that it will pay Humana a $1 billion breakup fee in good faith, per the companies’ original agreement.
Even with the Aetna-Humana deal off the table, Bertolini notes that his firm’s growth strategy has not shifted: “We will still pursue getting to every market in the United States for Medicare Advantage. When we look at Medicare Advantage and the 11,000 people retiring every day, 3,500 of them only select Medicare Advantage, while the rest go on traditional Medicare because there is no national footprint for Medicare Advantage and a portability across the country. So, if you are a mobile senior, even though Medicare Advantage is half the price of most traditional plans, most people do not buy it because they are afraid of a lack of mobility. So, there is still logic in making an investment in that area, which we will now do organically. Also, we believe that the only way to truly disrupt the cost of healthcare, which is 80 percent of our premium, is to go into the homes and meet the social determinants that are now driving as much as 60 percent of life expectancy in America. Your zip code matters more than your genetic code right now, regarding impacts on your life expectancy.” Clearly, Humana’s access would have helped with achieving these goals; however, Aetna appears determined to approach this organically now that the deal has fallen through. It is interesting to note that when asked about his thoughts on the future of the healthcare industry, Bertolini stated: “One of the things that I learned through the whole thing is that it is impossible to explain the business we are in. You look at five big companies going to three, that is myopic and immature logic because in most markets our major competitors are Blue Cross Blue Shield plans that have anywhere from 50 to 70 percent of the market. So, it is a local market phenomenon. Unless you are in a local market with some presence, you cannot compete. We lose to Blue Cross Blue Shield more than we do to each other. What is going on in the local market place is that both the providers and the large plans dictate the structure of the marketplace, and you are irrelevant unless you have a presence there.” Evidently, the market structure for this industry is not simple and consolidation of providers has mixed effects.
The Anthem-Cigna $48 billion deal did not end nearly as cordially as the Aetna-Humana deal. When their merger was stalled around the same time, the two companies began to throw accusations of harassment and sabotage back and forth. Cigna accused Anthem of trying to undermine its business by stealing confidential information and harassing its customers. Anthem countered and blamed Cigna’s CEO David Cordani for the deal falling through, claiming that he sabotaged the merger when Anthem rejected his demand to be made CEO of the combined company. While the companies were seeking regulatory approval for the deal, Cigna proceeded to sue Anthem, accusing the company of using the pending merger for its own benefit and to hurt Cigna. The company went so far as to say that Anthem’s actions ultimately led to the deal’s collapse when the Department of Justice sued to block it, and “Anthem’s destructive conduct must come to an end.” Cigna is seeking to recover a $1.85 billion breakup fee and $13 billion in damages.
In response, Anthem countersued Cigna to stop the company from terminating their agreement while Anthem pursues an appeal to overturn the court ruling blocking the merger. In its lawsuit, Anthem stated that the federal judge’s decision to block the merger on antitrust grounds does not kill the deal, and a change of lawyers at the DOJ with the Trump administration may provide “a path forward.” Anthem went on to claim that Cordani “disengaged from the merger process and embarked on an unprecedented campaign to sabotage the merger and procure a $1.85 billion reverse break-up fee because Mr. Cordani wanted to remain in charge of Cigna and to take the break fee to grow a company he runs.” In Cigna’s suit, the company claimed that Anthem “misappropriated” confidential information and told the market that it would copy innovative components of Cigna’s business if the deal did not close.
Overall, the current market environment in the health insurance industry is uncertain. With two of the industry’s five titans fighting, while two take their loss in stride, only time will tell what this industry’s concentration will look like as the US adjusts to new healthcare policies.