Anthem, Cigna call off merger, maybe mooting pending SCOTUS petition

After the Delaware Court of Chancery denied Anthem, Inc.’s motion for a preliminary injunction that would have prevented Cigna Corporation from terminating a merger agreement entered into between the two insurance giants two years ago but beset by legal challenges—including a lawsuit by the United States on antitrust grounds—Anthem finally agreed to terminate the agreement. Cigna, which stopped defending the agreement during the trial, which resulted in a holding that the agreement would harm the public (see Swan song for Anthem’s acquisition of Cigna?, Health Law Daily, February 9, 2017), reiterated its belief that Anthem breached its obligations under the agreement and therefore owes it a $1.85 billion reverse termination fee. Anthem believes that Cigna was first in breach, and is not entitled to the fee. The dueling announcements came one week after Anthem filed a petition for writ of certiorari in the Supreme Court, seeking review of the Circuit Court’s affirmation of the District Court’s decision (see Injunction barring Anthem’s acquisition of Cigna upheld, Health Law Daily, May 1, 2017).

A brief history of recent failed mergers. In 2015, proposed mergers were announced between four of the five largest health insurance companies in the United States. In addition to Anthem’s proposed acquisition of Cigna, Aetna Inc. attempted to purchase Humana Inc., and the subject quickly came under scrutiny (see To merge or not to merge, that was the question before a Senate subcommittee, Health Law Daily, September 24, 2015). While the companies indicated that the proposed acquisitions were in response to the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148), concerns about the resultant impact on the Medicare Advantage (MA) program were raised, in addition to concerns about stifling competition and slowing innovations. In July 2016, the Department of Justice (DOJ) filed lawsuits to prevent the two transactions, and the idea that Anthem and Cigna were not necessarily on the same page about the acquisition came to light as Cigna appeared less-than-enthusiastic about fighting the DOJ (see DOJ lawsuit steps in between Aetna-Humana and Anthem-Cigna mergers, Health Law Daily, July 21, 2016). Humana and Aetna terminated their pending merger agreement after the D.C. District Court halted that transaction (see Tale of two mergers: Cigna-Anthem goes South; Humana, Aetna drop plans, Health Law Daily, February 15, 2017; Aetna, Humana plan separate futures after dissolving merger plans, Health Law Daily, February 14, 2017; Aetna’s $47 billion purchase of Humana enjoined, Health Law Daily, January 23, 2017).

Anthem’s fights continue. Although Anthem agreed to terminate the merger with Cigna, the legal battle between the two companies will likely continue. In addition to the imminent fight over the reverse termination fee, Anthem’s writ for certiorari remains pending before the Court (No. 16-1342). The petition presented the question whether a 1967 Supreme Court antitrust decision “forecloses consideration of efficiencies in merger analysis,” and, if not, “whether and how a court must weigh [efficiencies] as part of a determination of net competitive effect.” According to the petition, there is a circuit split on the issue. The petition, however, may be determined moot because there is no longer an active case or controversy; it is unlikely that the Court will take up the question because the issue is capable of repetition, and not evading review.

Insurance antitrust exemption reform clears House

The House passed on March 22, 2017, H.R. 372, The Competitive Health Insurance Reform Act of 2017, with a bipartisan vote of 416 to 7. The Act repeals in part the McCarran-Ferguson Act antitrust exemption for insurers, including price fixing, bid rigging, and market allocation, and retains the exemption for certain collaborative activities. A CBO report projected that the Act would have no significant net effect on the premiums that private insurers would charge for health or dental insurance and that any effect on federal revenue would be negligible.

The report noted that health insurance premiums could be lower to the extent that enacting the bill would prevent insurers from engaging in practices currently exempted from antitrust law. On the other hand, insurers could become subject to additional litigation and thus their costs and premiums might increase. The CBO estimated that both of those effects would be small.

The American Hospital Association had expressed concerns about the abuse of market power by large commercial insurers with the Departments of Justice and Health and Human Services previously.

Tale of two mergers: Cigna-Anthem goes south; Humana, Aetna drop plans

Cigna Corp. has chosen to terminate its proposed merger agreement with Anthem, Inc., which would have combined two of the largest medical health insurance carriers in the U.S. in a $54 billion deal. The decision comes after a D.C. court order enjoining the transaction. The district court found that the merger would decrease competition and lessen choices in the health insurance market and that the competitive harm could not be offset (see Swan song for Anthem’s acquisition of Cigna?, Health Law Daily, February 9, 2017). In 2015, proposed mergers were announced between four of the five largest health insurance companies in the United States. In addition to Anthem’s proposed acquisition of Cigna, Aetna, Inc. attempted to purchase Humana Inc., and the subject quickly came under scrutiny (see To merge or not to merge, that was the question before a Senate subcommittee, Health Law Daily, September 24, 2015).

In Cigna’s announcement about the merger termination, the company noted that its decision was based on its belief that the proposed merger would not have been approved. To effect termination, Cigna filed a complaint in the Delaware Court of Chancery seeking declaratory judgment that it lawfully terminated the merger agreement and that Anthem is not permitted to extend the termination date. Cigna’s complaint seeks payment by Anthem of the $1.85 billion reverse termination fee contemplated in the merger agreement, as well as additional damages in an amount exceeding $13 billion. In response, Anthem sought a temporary restraining order in the same court to enjoin Cigna from terminating and taking any actions contrary to the terms of the proposed merger agreement. Anthem contended that there was still sufficient time to meet the merger agreement date of April 30, 2017, and that the merger would save more than $2 billion in annual medical costs for consumers. Anthem also provided a long list comparing the carrier’s interests in proceeding with the merger and Cigna’s interest in avoiding it.

In addition to Cigna and Anthem’s announcements following the D.C. court ruling, Humana and Aetna recently terminated their pending merger agreement (see Aetna, Humana plan separate futures after dissolving merger plans, Health Law Daily, February 14, 2017; Aetna’s $47 billion purchase of Humana enjoined, Health Law Daily, January 23, 2017). Under the terms of the merger agreement, Humana is entitled to a “breakup fee” of $1 billion, or approximately $630 million, net of tax. Of note, in order to demonstrate that its proposed merger with Humana would not run afoul of antitrust issues similar to the now contentious Anthem-Cigna merger, Aetna had pulled out of some health insurance exchanges for the upcoming enrollment period. Humana has now stated its intent to pull out of the exchanges for 2018. President Trump weighed in on the pullout, repeating the “repeal and replace” mantra. The pullout is based on Humana’s analysis of data associated with the company’s exchange membership following the 2017 open enrollment period, and what it perceived as future uncertainty in the risk pool.

Aetna, Humana plan separate futures after dissolving merger plans

Aetna Inc. and Humana Inc. announced the termination of their merger agreement as a mutual decision following a January 2017 federal district court ruling enjoining the merger. Aetna is now on the hook for a $1 billion “breakup fee” to Humana, as well as a termination fee for ending its agreement to sell Medicare Advantage (MA) assets to Molina Healthcare, Inc. (Molina).

Merger enjoined

In the decision enjoining the merger, the D.C. District Court focused on the merger’s impact in the MA market, and believed that the divestiture of some MA assets was insufficient to alleviate antitrust concerns (see Aetna’s $47 billion purchase of Humana enjoined, January 23, 2017). The Molina deal involved two separate agreements with the merging companies, which would have resulted in Molina gaining about 290,000 MA members for a total of about $117 million in cash. The federal government also challenged the merger’s potential anticompetitive effect on the health insurance marketplaces, even after Aetna’s withdrawal from the marketplaces in 11 states for the 2017 plan year. The court agreed with the government, finding that Aetna withdrew from competing in the 17 complaint counties for 2017 specifically to evade judicial scrutiny of the merger.

Aetna

Aetna’s Chairman and CEO Mark Bertolini stated that pursuing the merger further would be “too challenging,” despite Aetna’s belief that a combined company would benefit consumers. Bertolini noted that the companies have spent 19 months planning the deal, and spoke of Aetna and Humana’s mutual respect. Although the companies will now move forward separately, they share the goal of moving toward a health system centered on consumer needs.

On or about March 16, 2017, Aetna will redeem a large number of senior notes for cash, all of which were due at some point from June 2019 through June 2046. Aetna will fund this redemption with the proceeds of notes issued last year.

Humana

Humana’s initial press release was briefer than Aetna’s, announcing the mutual termination of the agreement and the expectation of receiving about $630 million from Aetna’s breakup fee payment, after tax. Humana expects to release 2017 financial guidance and a strategic plan update.