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.

Aetna slashes exchange presence; administration cries foul

Aetna, one of the nation’s largest health insurance companies, is slashing its marketplace participation by removing its current offerings from 536 counties. For plan year 2017, it will only offer marketplace plans in 242—as opposed to 778—counties in Delaware, Iowa, Nebraska, and Virginia. The company publicly stated that it based its decision on financial losses that it contends result from an unbalanced risk pool. The Obama Administration, however, argues that Aetna is following through on threats it made in a recent letter to the Department of Justice (DOJ) related to actions the DOJ has taken to block Aetna’s merger with Humana, indicating that Aetna would “immediately take action to reduce [its] 2017 exchange footprint” if the merger were “challenged and/or blocked.”

Reduction in presence

The insurer stated on its website that it suffered a “second-quarter pretax loss of $200 million and total pretax losses of more than $430 million since January 2014” in its individual products. Aetna maintains that marketplace insurers nationwide are struggling financially due to an unbalanced risk pool. It noted that its 2016 exchange membership increased by 55 percent in 2016 and that individuals requiring high-cost care now represent “an even larger share” of the exchange population. It also faulted “an inadequate risk adjustment mechanism” for the financial strain insurers face. The company promised to communicate options to those affected by its decision prior to the 2017 open enrollment period and reminded the public that it will continue to offer off-exchange plans in most affected counties.

Following through on a threat?

The announcement comes on the heels of a CMS analysis suggesting that higher enrollment has actually led to a more balanced risk pool and a decrease in costs (see Higher enrollment leads to lower costs, reflects healthier risk pool, Health Reform WK-EDGE, August 17, 2016). Obama administration officials, have suggested that Aetna’s move is retaliation for the government’s recent efforts to block the company’s desired merger with Humana (see DOJ lawsuit steps in between Aetna-Humana and Anthem-Cigna mergers, Health Reform WK-EDGE, July 27, 2016).

In a July 5, 2016, letter signed by Aetna Chairman & CEO Mark Bertollini and obtained by the Huffington Post, Aetna told the DOJ that the company’s ability to withstand losses incurred under the ACA “is dependent on . . . . achieving anticipated synergies in the Humana acquisition.” After explaining that challenges to the merger would force it to reduce or eliminate its exchange presence, it noted that if the merger were to proceed, “without the diverted time and energy associated with litigation, we would explore how to devote a portion of the additional synergies (which are larger than we had planned for when announcing the deal) to supporting even more public exchange coverage over the next few years.”

Senator Elizabeth Warren (D-Mass) noted in a Facebook post that Aetna recently referred to exchange participation as a “good investment.” She lambasted the insurer, stating, “The health of the American people should not be used as bargaining chips to force the government to bend to one giant company’s will.”