Antitrust Suits Could Upend Health Insurers' Strategies
July 21 2016 - 6:51PM
Dow Jones News
By Anna Wilde Mathews
If the Justice Department wins its two health-insurance
antitrust cases, the four companies involved would face business
challenges as they move forward alone.
All four -- Aetna Inc., Humana Inc., Anthem Inc. and Cigna Corp.
-- would be left without the additional scale that they said would
help them pare costs and boost their products. They would remain
substantially smaller than the industry's largest player by
revenue, UnitedHealth Group Inc., and could turn to other smaller
deals to gain at least some heft in key markets.
The cases are likely to take months to resolve, leaving the
companies with continued uncertainty in the medium term.
Aetna and Humana said they would battle the Justice Department
suit, as did Anthem. Cigna issued a statement that was less
clear-cut, leading analysts to speculate that, in light of earlier
tension between the two partners, Anthem and Cigna might ultimately
choose to abandon their agreement. Anthem and Cigna declined to
comment beyond their statements.
Without Aetna, Humana will maintain a narrow focus on Medicare
Advantage, which is a rapidly growing business but can be
operationally difficult. On Thursday Humana flagged improvements in
its Medicare business and announced a substantial upgrade to its
2016 earnings projection. Humana is already pulling back from its
Affordable Care Act marketplace business, which has run up
losses.
Humana would also come out of a busted deal with a substantial
cash cushion -- $1 billion from Aetna. Chief Executive Bruce D.
Broussard said Thursday that the company's "core business continues
to do well," and money from a breakup fee would be used according
to previous capital-allocation plans, which include possible
spending on acquisitions, share buybacks and dividends.
Aetna Chief Executive Mark T. Bertolini would lose the chance to
quickly forge a diversified insurance powerhouse with government
business balanced against traditional commercial coverage, though
Aetna had previously been working to build up its Medicare and
Medicaid businesses.
Aetna would likely be less inclined to remain a major player in
the challenging ACA exchange business if its combination with
Humana fell through. As a solo company, with the costs associated
with the busted deal, Aetna would have "less bandwidth to take
risk," a person with knowledge of the matter said. Lacking Humana,
Aetna would continue with its long-term strategy of investing in
opportunities for organic growth, potential acquisitions and share
buybacks, this person said.
If both deals are blocked, Anthem would remain the
second-biggest insurer, with a large Medicaid business and powerful
commercial franchise in its 14 main states. But Chief Executive
Joseph R. Swedish would still face a continuing legal battle with
pharmacy-benefit manager Express Scripts Holdings Inc., as well as
difficulties with the ACA exchanges.
Anthem has told investors that if the Cigna combination
collapsed, it would move to purchase its own shares, as well as
consider other acquisitions in the Medicaid and Medicare
categories.
According to the merger agreement, Anthem will have to pay Cigna
$1.85 billion if the deal is blocked on regulatory grounds, but the
fee won't be owed if Cigna makes a "willful breach of its
obligations" to complete the deal, leaving the door open to
litigation by Anthem against Cigna.
Cigna's CEO, David Cordani, will likely get tough questions from
investors about the fate of the Anthem deal, if it does collapse.
Cigna would remain the smallest of the big five national insurers,
with about $38 billion in revenue last year.
Analysts have said that, armed with the Anthem breakup fee and a
substantial existing cash stash, Cigna would likely move to bulk up
with an acquisition, perhaps of a Medicaid-focused insurer, or
Medicare assets.
In its Thursday statement, Cigna highlighted its strength as a
stand-alone company, saying it has "remained strong by continuing
to invest in innovative solutions...."
Write to Anna Wilde Mathews at anna.mathews@wsj.com
(END) Dow Jones Newswires
July 21, 2016 18:36 ET (22:36 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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