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Why a giant health insurer merger is probably destined to fail

Shelby Livingston   

Why a giant health insurer merger is probably destined to fail
  • The giant health insurers Cigna and Humana are reportedly considering a merger.
  • While they offer different kinds of health insurance, the deal is likely to face antitrust scrutiny.

Cigna and Humana, two of the biggest, richest health insurers, are considering merging in a monster deal that would have seismic implications for US healthcare, Reuters, Bloomberg and The Wall Street Journal reported this week.

But antitrust experts say such a merger would have a hard time standing up to the scrutiny of a Department of Justice that's arguably stronger than the one that blocked previous proposed insurance megamergers six years ago.

A deal between Cigna and Humana would create a healthcare conglomerate worth about $140 billion, based on their combined market caps, and help it compete with the nation's largest healthcare company UnitedHealth Group, which has a market value of about $500 billion.

Cigna, which boasted revenue north of $180 billion in 2022, primarily administers health plans for large employers. Combining with Humana, with annual revenue of about $93 billion, would give Cigna a powerful presence in Medicare Advantage, the lucrative, private health-plan market for people 65 and older.

Combined, they serve about 37 million people in health-insurance plans. Both companies also own large pharmacy-benefit managers that administer prescription-drug plans.

Equity analysts at BofA wrote in research notes that Cigna and Humana have little business overlap in insurance, and where they do, they may be able to divest some assets to alleviate antitrust concerns. Still, analysts at several investment firms warned the merger would throw together two large PBMs, which is bound to invite significant scrutiny.

Antitrust experts said that even with divestitures the insurers would face an uphill battle convincing skeptical antitrust enforcers that their combination won't harm competition and consumers.

"The parties have an incredibly daunting task ahead of them. The agencies are much stronger enforcers than they were back in 2016. They are much more skeptical about some of the arguments that will be crucial to the merging parties, such as the role of efficiencies," said David Balto, a consumer advocate and the former policy director of the Federal Trade Commission.

Giant insurers' past attempts to combine failed

Reports that Cigna and Humana want to pursue a merger are somewhat surprising given previous attempts between giant health insurers went up in flames, leading in one case to a prolonged, expensive legal battle. Still, Cigna and Humana did toy with a deal way back in 2014 before they pursued deals with other partners.

In mid-2015, Cigna and Anthem said they would pair up in a $54 billion deal, while Aetna and Humana sought a $37-billion tie-up. But federal judges blocked both proposed mergers in 2017 after they were challenged by the Justice Department for threatening to harm competition in various insurance markets.

Cigna and Anthem sued each other for billions, each arguing that the other had sabotaged the deal. Years later, in 2020, a Delaware court ruled that neither of the companies could recover any damages.

Later, to sidestep antitrust scrutiny, health insurers eyed mergers with other pieces of the healthcare system outside of insurance. In 2018, Cigna combined with the pharmacy-benefit manager Express Scripts and pharmacy chain CVS Health bought Aetna.

Humana, meanwhile, pushed deeper into providing care directly to patients by acquiring home-health company Kindred and building primary-care clinics for seniors.

Cigna and Humana would face a more skeptical Justice Department

Any deal between health insurers the size of Cigna and Humana would have to get past the Justice Department's antitrust enforcers. That's not going to be easy.

Not only are health-insurance markets already heavily consolidated, but antitrust enforcers under the Biden Administration have adopted a more aggressive stance toward all types of healthcare mergers in the past year. The FTC has also dialed up scrutiny of PBMs, and though the Justice Department likely would review an insurance merger, the two agencies often work together.

Balto said the Justice Department is "vastly more sensitive" to whether mergers will harm consumers and healthcare providers, whereas in the past it focused on a merger's impact on businesses such as employers.

Barak Richman, law professor at Duke University, said that traditionally, antitrust enforcers took a narrow view of harm, scrutinizing overlap between businesses in specific geographic markets. But he said there's now a greater appetite to challenge mergers based on "more expansive theories of harm."

"These are two large health-insurance companies. They offer insurance products all over the country. They engage with providers all over the country. They both have PBMs and provide pharmaceutical benefits all over the country. The analysis has to have a more wide-angle lens."

Research has shown that when insurers merge, health-plan premiums increase.

The insurers may argue that they have little overlap between their businesses. Already, Cigna is considering selling its small Medicare Advantage business, Reuters reported earlier this month. And Humana in February said it was getting out of the commercial-insurance business over the next 18 to 24 months.

But Matthew Cantor, an antitrust expert and partner at the law firm Constantine Cannon, said divestitures aren't always a sure fix. He pointed to the failed merger attempt between Aetna and Humana, in which the court determined that Aetna's plan to sell Medicare Advantage plans to Molina wouldn't help replace competition.

"All of this comes down to not only are they going to divest, but who's going to buy it?" Cantor said. "Are they a vibrant competitor? Or is it going to be that someone's going to buy this and not know how to run it and it's going to be run to the ground, and at the end of the day you're going to be left with a more powerful Cigna. That's going to be the question."

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