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.

AHA, hospital executive support for hospital mergers, despite antitrust concerns

Hospital mergers have reduced annual operating expenses at acquired hospitals, and evidence from a study cited by the American Hospital Association shows quality and service improvements stemming from mergers. According to Charles River Associates, despite antitrust concerns from the Federal Trade Commission (FTC), hospital leaders believe that mergers are a better tool for achieving better care coordination and population health management than looser affiliations between parties.

Cost savings

An analysis of non-federal short-term acute care hospital mergers between 2009 and 2014 revealed a 2.5 percent reduction in operating expense per admission at the acquired hospitals, implying annual savings of about $5.8 million (derived from average annual operating expenses). Net patient revenue per admission also declined relative to non-merging hospitals, suggesting that mergers may reduce health care costs.

Interviews with hospital executives placed savings into three categories: scale-related savings from allocating fixed costs over a larger volume of patients, reductions in cost of capital, and standardized clinical processes. In particular, supply chain savings from group purchasing and reduced overhead following consolidation of back office services were cited as important cost-saving benefits of merging.

Quality improvement 

While the study was able to quantify some cost savings related to mergers, positive effects on quality were less obvious, despite executives stressing the impact of quality improvements following clinical standardization after a merger. Small improvements were observed in a decrease in the composite indices of 30-day readmission rates, 30-day mortality rates, and overall outcome, but the only statistically significant result was a 10 percent change in the readmission rate result. The authors admitted that the modest results may partially stem from difficulty in quantifying hospital quality.

Merger specificity

The FTC asserts that improved care coordination and other benefits touted by merger supporters are not merger-specific and can be achieved through other means of association. Hospital leaders disagree based on experience showing that “looser affiliations” between parties fail to provide the necessary level of commitment and accountability to achieve the necessary cost savings and quality benefits to effectuate health reform. The interviewees opined that alliances between parties are not able to overcome the divide of being part of different systems, resulting in unwillingness to invest capital, reluctance to share intellectual property, inability to align incentives and create a common culture, and regulatory roadblocks on information sharing. The authors noted that successful loose affiliations are usually narrow in scope, limiting the cooperation to combining supply chain efforts or developing joint back office function collaborations (without sharing data between affiliates). If clinical areas are involved, they are usually limited to support services.

FTC staff opposes Virginia hospital systems’ cooperative agreement

The Southwest Virginia Health Authority and State Health Commissioner should deny a cooperative agreement application submitted by Mountain States Health Alliance and Wellmont Health System, according to comments submitted by staff of the FTC Bureau of Competition, Bureau of Economics, and Office of Policy Planning.

Mountain States and Wellmont are the two largest hospital systems in the border area of Southwest Virginia and Northeast Tennessee, and they are the only two full-service hospital systems serving the vast majority of patients living in this area, according to the FTC staff’s comments. Together, the hospitals would purportedly hold a near-monopoly over inpatient services in the area and have significant shares in several outpatient services and physician specialty service lines.

Consequently, the FTC staff—after a year-long assessment of the proposed merger—concluded that the proposed deal “presents substantial risk of serious competitive and consumer harm in the form of higher healthcare costs, lower quality, reduced innovation, and reduced access to care.”

The hospitals proposed several commitments they claimed would control and mitigate any anticompetitive effects, including price commitments. However, these commitments would be insufficient and unlikely to mitigate the anticompetitive effects, according to testimony presented by Mark Seidman, FTC Deputy Assistant Director for the Mergers IV Division.

“[T]he price commitments described in the application are ambiguous and appear to leave the hospitals with the opportunity and incentive to obtain higher prices from health insurers,” Seidman stated. “And even if prices were successfully constrained, it would do nothing to prevent harm to quality of care, and in fact would make that harm more likely.”

It also was noted that “once a merger is consummated—whether under a cooperative agreement or otherwise—it is extremely difficult to unwind.” Consequently, approving the cooperative agreement would risk that the deal would become permanent, especially because the plan of separation submitted by the hospitals did little to alleviate the significant challenges of “unscrambling the eggs,” following the merger.