Insurance Company Mergers

Who wants to merge with whom?

Aetna / Humana

• Update Feb. 14, 2017

Aetna Inc. and Humana Inc. have agreed to not appeal a judge's decision to block their merger on antitrust grounds.  Humana walks away with a $1 billion breakup fee.  Humana is now an attractive takeover target once again.

• Update Jan. 24, 2017

U.S. District Court judge John Bates has blocked the merger.  An appeal is possible.  The ruling included some critical comments regarding Aetna.

Mr. Bates stated that Aetna tried to "leverage" the company's continued participation in federal Affordable Health Care Act exchanges in exchange "for favorable treatment from the DOJ regarding the proposed merger."

♦ Aetna is trying to buy up Humana at the tune of $37 billion.   Aetna had an annual revenue of $60 billion in 2015.  Humana had an annual revenue of  $54 billion in 2015.

Aetna is the third-largest health insurer in the U.S..  The acquisition of Humana would not make Aetna the largest insurer overall but it would allow it to become the largest insurer in the managed health care industry.

Much of the attention on this merger has been around private Medicare plans which Humana is strong in.  An Aetna-Humana combination would be the largest seller of Medicare Advantage plans.

♦ Aetna agreed to purchase Coventry Health Care in 2012 for about $5.7 billion in cash and stock, a move Aetna said ‘would help it expand further into government-backed programs like Medicaid and Medicare’.  Obamacare would expand Medicaid throughout a large portion of America and Aetna wants a piece of the pie.

This was after Aetna donated close to $7.8 million dollars to conservative groups and organizations to lobby against Obamacare.

♦ Humana’s Medicare Advantage membership is about 3.19 million (17% of the market).  Aetna has around 1.38 million (7%, of the market).  

To try to satisfy the Justice Department concerns, Aetna suggested selling off some of its Medicare Advantage assets.

Analysts say that both Centene and WellCare have made offers to buy plans Aetna might seek to divest to win approval for their merger.  

♦ Three players: Centene, Molina, and WellCare have a large presence in Medicaid health plans for the poor and Medicare Advantage coverage for the elderly.

Centene is still chewing on the debt it took on to complete its merger in March of 2016 with Health Net.

WellCare is believed to be in the best position to take advantage of any Medicare Advantage divestures by Aetna.  Should that happened, WellCare would likely become the 5^th largest insurer of Medicare Advantage plans surpassing Cigna.

WellCare has almost 3.8 million members across its Medicaid, Medicare Advantage and Medicare Part D prescription drug plans. It does not sell plans on the exchanges.  WellCare’s annual revenue in 2015 was $13.9 billion.  They have set aside $1.25 billion for potential acquisition.

However, should Aetna fail in its merger it is expected Aetna will turn its attention toward acquiring one or more of these companies.

Anthem / Cigna

Anthem is trying to gobble up Cigna for close to $50 billion.  The acquisition is expected to create the largest health insurer in terms of enrollment, with more than 54 million members and roughly $117 billion in annual revenue. 

The merger is not going well. The Justice Department has concerns but also both companies have been quoted as accusing each other of breaching the merger agreement.   If the deal breaks, then Anthem would need to pay Cigna a $1.85 billion breakup fee, according to their merger documents.

• Updated Feb. 16, 2017

Cigna on Tuesday announced it was done with the merger.  They then sued Anthem, seeking a $1.85 billion breakup fee plus more than $13 billion in damages.  Anthem fired back with their own lawsuit to stop Cigna form ending the merger.

A Delaware judge on Wednesday issued a temporary restraining order that blocks Cigna from immediately terminating the merger.

• Update Feb. 08, 2017

U.S. District Judge Amy Berman Jackson said the proposed deal between the two health insurers violated federal antitrust law because it would create an unacceptable reduction in the number of companies able to serve large multistate employers.

Anthem has said they will appeal but Cigna is questioning whether Anthem can do that without their backing.

Either way, Cigna stands to gain.  A sizeable breakup fee is in the mix.

Anthem

Anthem was founded in the 1940s, prior to 2014 it was known as WellPoint, Inc. It is the largest for-profit managed health care company in the Blue Cross and Blue Shield Association.

It was formed when Anthem Insurance Company acquired WellPoint Health Networks, Inc., with the combined company adopting the name WellPoint, Inc. 

On December 3, 2014, WellPoint changed its corporate name to Anthem Inc.

Anthem had an annual revenue of $79 billion in 2015.

Anthem is commonly thought of as being Blue Cross Blue Shield.

Blue Cross Blue Shield is actually an association offering insurance plans.  BCBS insurance companies are then licensees, independent of the association.

Anthem BCBS came about by the acquisition and merger of a number of Blue Cross Blue Shield organizations during early 2000.  These organizations started out as being non-profit and were converted to for-profit under the WellPoint and eventually Anthem name.

Blue Cross and Blue Shield insurance companies offer some form of health insurance coverage in every U.S. state. They also act as administrators of Medicare in many states or regions of the US and provide coverage to state government employees as well as to the federal government employees under a nationwide option of the Federal Employees Health Benefit Plan.

Cigna

Offers a number of health and life insurance products worldwide.  It operates in 30 countries. 

It sells medical, dental, vision, disability, life and accident insurance and related products and services.  The majority of its products are offered through employers.

 Cigna also offers Medicare and Medicaid products and health, life and accident insurance coverages to individuals.

In the fall of 2011, Cigna agreed to buy HealthSpring Inc. for $3.8 billion.  This acquisition gave Cigna a big boost in Medicare plans going from 46,000 Medicare Advantage members to 400,000 members.

It had around $38 billion in revenue for 2015.

Centene / Health Net

While Aetna and Anthem were working on their merger deals in the spring 2016, Centene completed a merger with Health Net estimated at $6.3 billion.

The combined company is now the largest Medicaid managed care organization in the country.

Why do they want to merge?

They do this to make more money of course.

Merging companies always argued they will achieve cost savings and better results for customers from the larger scale that their combined operation would bring.

This argument has not held up well in the healthcare industry.  A couple things that remain common with mergers of this scale is people get laid off and underperforming assets get dumped to raise cash.

♦ Both mergers site the changes and challenges caused to them by the Affordable Care Act.  The truth is Aetna and Anthem aspire to be the size of their industry’s largest player which is UnitedHealth Group.

UnitedHealth Group had revenues of $157 billion in 2015.

One reason these health insurers are seeking to get bigger is that the hospitals and doctor groups are merging and getting bigger.  There were over 95 hospital mergers in 2014 and the trend has been going on for years.  It is expected to continue.

As these groups get larger, their negotiating power increases.

♦ Experts point out, Insurance companies’ size embolden them to raise premiums, knowing it will be difficult for consumers to find alternatives.

An analysis published in the Journal of Technology and Science found that “the largest insurance company in each state on average increased their rates 75 percent more than smaller insurers in the same state”.

Researchers at Northwestern University, observed that the merger of Aetna and Prudential back in 1999 “raised premiums by roughly 7 percent”.

A subsequent study of Nevada markets observed that the merger between United Health Group and Sierra resulted in premium increases of nearly 14 percent.

Should we care?

Yes.  Mergers of this type lead to less competition.  Less competition leads to higher prices and in most cases fewer choices for us.