CI Cigna Group

By Brent Kendall and Anna Wilde Mathews 

WASHINGTON -- A federal judge Monday blocked the proposed merger of health insurers Aetna Inc. and Humana Inc. on antitrust grounds, a potentially fatal blow to the $34 billion deal and a capstone victory for Justice Department antitrust officials under former President Barack Obama.

U.S. District Judge John D. Bates ruled the Justice Department had proven its case that the merger would unlawfully threaten competition. harming seniors who buy private Medicare coverage as well as some consumers who purchase health plans through an Affordable Care Act insurance exchange.

The government's challenge to the merger was among the last major law-enforcement actions taken by Obama administration antitrust officials. The administration also challenged Anthem Inc.'s proposed acquisition of Cigna Corp ., and a ruling in that case is expected any day. Together the deals could have transformed an industry already facing uncertainty from Republican plans to dismantle the Affordable Care Act and replace it with another health-care plan.

The ruling by Judge Bates, a George W. Bush appointee, followed a 13-day trial last month. The Justice Department filed a lawsuit last year challenging the proposed merge, which Aetna and Humana announced in July 2015. The two companies said the deal would allow them to offer more cost-effective products by combining their strengths and becoming more efficient.

For Judge Bates, the proposed transaction was particularly problematic for the sale of Medicare Advantage plans, a government-backed alternative to traditional Medicare that is offered to seniors by private insurers.

Combining Aetna and Humana likely would lead to a substantial lessening of competition for these plans in 364 counties, the judge said. Humana is one of the biggest players in the market and Aetna in recent years expanded its Medicare Advantage footprint aggressively, putting it "on a collision course with Humana," Judge Bates said.

"This head-to-head competition benefits seniors who shop for Medicare Advantage plans in the form of broader networks and lower costs," the judge wrote in the opinion.

He rejected the insurers' argument that the merged firm wouldn't be dominant because government-run Medicare was part of the same market. That holding sets an important precedent for the managed-care industry. If the judge had reached the opposite conclusion, companies likely would have perceived a green light for more ambitious deal-making.

Judge Bates also said the merger would harm competition on Affordable Care Act insurance exchanges in parts of Florida.

Aetna last year withdrew from selling plans on most state exchanges, including in Florida, citing mounting financial losses. The insurer said its move made the government's argument on this point moot, but Judge Bates disagreed, saying Aetna withdrew from certain locations "specifically to evade judicial scrutiny of the merger."

A Humana spokesman said "Aetna and Humana are reviewing the decision." Aetna signaled it may not be ready to give up its fight for the deal. "We're reviewing the opinion now and giving serious consideration to an appeal after putting forward a compelling case," Aetna spokesman T.J. Crawford said.

Merging parties don't often appeal adverse court rulings because of the time, money and uncertainty involved in trying to keep a deal together during prolonged litigation.

Aetna potentially could seek to start new discussions with incoming Trump administration antitrust enforcers about a way to salvage the deal, but it could be weeks or months before a new Justice Department antitrust team is fully in place. Even if such talks did unfold, Aetna and Humana are now facing a court ruling that says unequivocally the deal violates federal antitrust law.

In trading Monday, shares of Humana rose 2.2%, and shares of Aetna fell 2.7%.

The companies' merger agreement is set to expire Feb. 15, after which either insurer could walk away from the deal.

The Justice Department said the court's decision would save customers and taxpayers up to $500 million a year. "Aetna attempted to buy a formidable rival, Humana, instead of competing independently to win customers," said Deputy Assistant Attorney General Brent Snyder, a career official temporarily heading the antitrust division.

Humana is the second-largest Medicare insurer, with around 3.3 million beneficiaries, or about 16.9% of the Medicare Advantage market, according to Credit Suisse. Aetna is fourth, with about 1.4 million beneficiaries and 7.2% of the Medicare Advantage market. Combined, they would surpass the enrollment of Medicare Advantage leader UnitedHealth Group Inc.

The government's antitrust concerns focused more on particular geographies, not national market share, because Medicare Advantage plans are sold on a local basis. Aetna and Humana had argued they could alleviate the concerns by divesting -- or selling off -- assets representing about 290,000 enrollees in 21 states to Molina Healthcare Inc., a managed care company focused primarily on Medicaid.

Judge Bates ruled, however, that the proposed divestiture "would not ameliorate the anticompetitive effects of the merger."

Molina said it was disappointed in the ruling but remained committed to growing its Medicare business.

After Monday's ruling, Aetna and Humana now face the prospect of going it alone, without the added cost-squeezing scale and clout they had hoped to gain in their combination.

Without the deal, Humana maintains a narrow focus on Medicare Advantage, a rapidly growing business but one that can be operationally difficult. The changeover to Republican control in Washington is generally seen as a positive for private Medicare plans. Humana has already pulled back from its ACA marketplace business, which had run losses, and thus reduced its risk from upheaval if the health law is repealed.

Humana is also poised to emerge with a $1 billion breakup fee from Aetna if the deal doesn't close. The company has previously said money from the breakup fee would be allocated according to its earlier capital plans, which include possible spending on acquisitions, share buybacks and dividends.

If the deal dies, Aetna Chief Executive Mark T. Bertolini would lose the chance to rapidly build a diversified insurance powerhouse with government business balanced against traditional commercial coverage. Aetna remains far smaller than UnitedHealth and Humana in the important Medicare market. It will have to find other engines for growth, either organically or through smaller-scale deals.

Aetna has already sharply scaled back its position in the ACA marketplaces this year after deepening losses. Its footprint has fallen to four states, down from 15 in 2016.

Hospitals and doctors have watched insurance industry consolidation warily, amid concern that larger insurance firms would push to impose lower reimbursement rates on health-care providers. Both the American Medical Association and American Hospital Association cheered the judge's ruling.

Write to Brent Kendall at brent.kendall@wsj.com and Anna Wilde Mathews at anna.mathews@wsj.com

(END) Dow Jones Newswires

January 24, 2017 02:47 ET (07:47 GMT)

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